Loss Carry-Back Rules
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GRA Blogs
Articles by Anthony Strevens
Last week the Government introduced the Covid-19 Response (Taxation and Other Regulatory Urgent Measures) Bill. This bill contains a number of provisions, including the introduction of a loss carry-back scheme whereby a business can carry a loss back to a prior period to offset the prior period’s profits. Thus the business can get a refund of the tax paid in that prior period or relief from the provisional tax due. Before this bill was introduced, you could only carry losses forwards to future periods to offset future taxable income.
The intention of these measures is to provide cash flow relief for businesses in the short term, by allowing tax payers to get refunds or to be able to re-estimate their provisional tax payments on the basis of estimating future year losses.
How does the loss carry-back scheme work?
The scheme only allows for losses to be carried back one year. Either from the year ended 31 March 2020 back to the year ended 31 March 2019, or from the year ended 31 March 2021 to the year ended 31 March 2020. The scheme also allows for losses to be estimated for the purpose of carrying back. However, if you end up over-estimating losses then you will be charged interest on the shortfall of tax paid.
If you think you will be able to make use of this scheme, it’s important to get your year end 31 March 2020 tax information up to date so that you can understand your tax position. If you have run at a loss in the year to 31 March 2020, then you may be able to carry this back and get a refund of tax paid for the year to 31 March 2019. Alternatively if the year to 31 March 2020 shows a profit, but you estimate a future loss for the year to 31 March 2021, then you may be able to use the estimated 2021 loss to allow relief from provisional tax payments for the 2020 year.
What about loss ring-fencing for residential property?
Many readers will be aware of the recent introduction of residential rental loss ring-fencing where losses from residential rentals have to be carried forward to future years, and may wonder how these two sets of rules interface. Unfortunately, the IRD is advising at this stage that the ring-fenced rental losses cannot be carried back under this new scheme.
Summary
If your business has made a loss in the year ending March 2020 or anticipates a loss in the year ending March 2021, you may qualify for loss carry-back. This, however, does not apply to residential rental property, which is still subject to the loss ring-fencing rules.
Of course there are further details of the scheme that will affect whether or not you can qualify, so get in touch with your Client Services Manager at GRA as soon as possible. Or if you are not yet a GRA client, we would be happy to talk to you to see how we can help: phone +64 9 522 7955, email info@gra.co.nz or fill in our online form.
Anthony Strevens
Business Advisory Director
© Gilligan Rowe & Associates LP
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Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.
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