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Terry Baucher looks at whether the tax loss carry-back proposal will help small businesses. He also advises, watch out for the trap in the foreign investment fund regime, and claiming home office deductions

Terry Baucher looks at whether the tax loss carry-back proposal will help small businesses. He also advises, watch out for the trap in the foreign investment fund regime, and claiming home office deductions

In today's podcast, will the latest government tax measures help small businesses? The inherent flaw in the foreign investment fund regime. And we look at claiming deductions for working at home.

The temporary loss carry-back scheme announced by the Government last Wednesday was one of the most significant tax measures yet.

It enables businesses that were expecting to make a loss in either the 19/20 income year or the 20/21 income year to estimate the loss and use it to offset profits in the previous tax year. In other words, they could carry the loss back one year.

Now, this is a measure I've seen before and used when I was working in the United Kingdom. That measure was introduced in the wake of a fairly severe recession in the late 80s, early 90s. It’s a promising measure which is expected to cost up to about $3.1 billion over a two-year period.

However, my tax agent colleagues are concerned that we've only just ended the year end 31 March 2020. And right up until 1st March, everything was running reasonably smoothly before the effects of Covid-19 landed with a big thump. Companies with a standard balance date of 31st March 2020 won't actually have been significantly affected by the Covid-19 pandemic, but it's quite likely that in the year to 31 March 2021 they will be.

The issue we have is that that's a long way out to be predicting losses. And what if we get those estimates wrong?  The position is that use of money interest would still apply.  Although the temptation would be to make a guess at an estimated loss for the coming financial year and then carry that back to the 2020 tax year, it comes with the caveat that use of money interest - currently 8.35% - will apply on any underpaid tax. It's a very much a dual-edged sword.

So, the main concern that my colleagues have about the loss carry-back proposal expressing is that it's really not terribly helpful for small businesses that have a standard 31 March balance date because they're being asked to predict too far ahead and with too many variables.

The better option is, as I've said previously, would be to postpone or cancel the 7 May provisional tax payment coming up, let things settle down a bit and then work forward from that.

The loss carry-back measure is going to be introduced as a permanent feature with effect from the start of the 2021/2022 income year and the Government will take consultation later this year on the proposal. It is a measure that I've thought for some time would be useful.

The problem is its timing is not terribly convenient for many small businesses right now. And this points to a dichotomy in our tax legislation and tax policy.

The majority of taxpayers and small businesses prepare their financial statements, their tax returns to 31 March. But the majority of provisional tax, however, is paid by bigger companies, and many of those have different balance states.  The Government SOEs have a 30 June balance date and then overseas companies might have a 31 December or 30 September balance date.

Now, if you've got a 31 December balance date, you've got to wait a bit of time ahead, but you'll probably get a better handle on what's going to be happening. That's even truer of those with a 30 September balance date because this has happened halfway through their tax year.

So larger businesses are probably going to be the primary beneficiaries of this measure. It's not to say it's of little use to small businesses. It's just they're going to need to proceed with caution because the use of money interest provisions will apply.

I think that this measure will need to be fine-tuned. As I said earlier, I do wonder whether it might just be easier to simply say forget about paying provisional tax on 7 May.  

Alternatively, maybe do as the Canadians have done. They've introduced a measure where a business can borrow up to 40,000 Canadian dollars from the Government, and if they repay it by 31 December 2022, 25% of the amount borrowed will be written off.  Such a measure will help companies with their cash flow, which is the critical matter for small business at the moment.

But still this loss carry-back measure is going to be of use. It's something that will become part of the tax landscape and we should never look a gift horse in the mouth.

There's a couple of other things the Government measures announced as well, which are also important for small businesses. One is the changes to tax loss continuity rules.

Currently, if you have a tax loss and you want to continue to carry forward that loss, you must maintain 49% of the same shareholders, what we call the shareholder continuity rule. What has been an issue for some time for growing businesses is that a significant investor wants to come onboard and they want to have more than 51% of the company, maybe a 60- 70% stake. If they do that, then under the current rules, the losses accumulated to that point are forfeited.

This is something we in the Small Business Council recommended be reviewed. It’s therefore good to see this proposal that with effect from this income year – 1 April for most people - if you can show that you're continuing to carry on a same or similar business as that prior to the change of shareholding, you can continue to carry forward losses. This is a test modelled on what happens in Australia. It’s a welcome move for fast growing companies who want to attract capital but don't want to lose the value of the tax losses.

The other tax measure announced gives Inland Revenue discretion to temporarily change due dates and other procedural requirements outlined in the various Inland Revenue acts. This is for businesses and individuals affected by Covid-19.  This will enable Inland Revenue to extend the filing date for elections and filing tax returns or defer the due date for payment of tax.

This is a good move. It gives Inland Revenue flexibility, which it probably should’ve always had, but it never really managed to see a need for such a measure beforehand. That said, I still think there’s one or two other things that legislative changes will be needed around. For example, accidental overstayers becoming tax resident. But on the whole, this proposal is a good move, and we'll look forward to seeing that in operation very quickly.

KiwiSaver and the Foreign Investment Fund regime rules

Moving on, the foreign investment fund regime was introduced with effect from 1 April 2007. Those who know this rule should also know it applies to KiwiSaver account holders if their KiwiSaver fund is invested overseas.

Basically, the rules say that for KiwiSaver funds, the income to be determined is calculated using what is called a fair dividend rate, that is 5% of the portfolio’s opening market value at the start of the tax year.

Now for individuals, they have the option to take the actual accrued gains/losses over the tax year. And that means that when there was a significant fall in the markets, individuals are protected against that and don't have to pay tax on a portfolio which has just suddenly depreciated in value.

But unfortunately for KiwiSaver accounts, they don't have an alternative. And this is also a big problem for the New Zealand Superannuation Fund, the country's largest taxpayer, because it has a huge portfolio of overseas investments.

Now, the FIF regime has been in place, as I said, for 13 years now. And Covid-19 is the second such financial crisis to have hit financial markets since the regime was introduced. The flaw in the regime is it's predicated on markets continually going up or being stable.

Events such as we are seeing right now and in the Global Financial Crisis are anomalies which the FIF regime really doesn't manage well. Particularly if portfolios are significantly devalued for a period of time to come and if you look at the overall economic return, sometimes too much tax will be paid.

The Tax Working Group recommended reviewing the 5% fair dividend rate and possibly reducing it perhaps to – maybe 3 or 4%. And I think that's something the Government really need to look at. But - there's always a but - it's going to need the revenue going forward. So, whether in fact that measure, which I believe is needed and the Tax Working Group recommended, will actually come to pass, we'll have to wait and see.

Home office dedutions

And finally, many listeners and readers will be working from home and will continue to do so when we go to alert Level 3. So what are the rules around claiming expenses for working from home? Well, I did an article on this. The basic rules are as an employee, you can't claim a deduction. 

Instead you are able to be reimbursed by your employer who can make a reasonable estimate of the amount that you should be claiming based on a number of factors such as area of the place you're working in - your home office, rates, power, Internet usage, etc. A reimbursement based on this is tax free to the employee and deductible to the employer.

If the employer decides to simply pay a flat rate, it might in fact be more than what is actually a reasonable calculation of expenses. Instead, PAYE will apply.

What was interesting to see about that article was the reaction to it - several employers are applying the rules clearly. Others are completely oblivious to it, and others are simply ignoring the fact that their employees have an expense and just simply expecting them to bear the costs. It will be interesting to see how this shakes down.  All employers will need to be looking at this matter and determining some form of allowance to help their employees.

Well, that's it for this week. Thank you for listening. I'm Terry Baucher and you can find his podcast on my website www.baucher.tax or wherever you find your podcasts. Please send me your feedback and tell your friends and clients. Until next time Kia Kaha. Stay strong and be kind.


This article is a transcript of the April 17, 2020 edition of The Week In Tax, a podcast by Terry Baucher. This transcript is here with permission and has been lightly edited for clarity.

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14 Comments

Nail on the head re the temporary loss carry back not being a lot of use for the majority of SMEs, and the far better option is simply to cancel all 2020 final provisional tax instalments and pick that up in a year's time via terminal tax. There no work or risk involved in that so long as safe harbour taxpayers are still covered by no penalties or interest through not paying that third instalment.

But if IRD or Grant Robertson is reading, then I like the permanent loss carry back which will be off actual figures, but this temporary carry back doesn't make sense on its own terms, as the nature of this crisis is earnings are unknowable, indeed, arbitrarily determined by government's implementation of levels and definitions of those levels which business cannot know, so given earnings are unknowable, tax relief from a business having to predict earnings, on the cross of penalty if they overestimate losses, doesn't make any sense and is frankly a moral hazard. Just cancel P3, please.

People will tolerate lots of nonsense from their Government , until it hits them in the pocket .

And its about to............... on the TAX front there is this narrative in the media suggesting those earning over NZ $70k should pay 40%personal income tax, and 60% at $150k , and 80% tax at over $300k and on top of that ..........there will be a wealth tax .

That "wealth " could in theory include your Kiwisaver , as that is an asset

Problem with taxing high earners is that you render them unable to pay the wealth tax without them being forced to sell the asset or part of it to pay the tax .The net result is that asset prices collapse with implication for Banks ( who often fund he assets) and pensioners ( who have accumulated a little nest egg )

The whole idea of taxing us into poverty is so exciting for this COL they can barely contain themselves .

Income tax rises are inevitable. Wealth tax, hmmm. Don’t forget that National can count on 40-45% support. Act is on the rise, and NZ First has a strong 4%+ floor. A wealth tax would need a pretty low starting point to be effective, what with income splitting, trusts, and the myriad ways to mitigate it.

Income tax rises that high will send many people overseas to (...where?). Short term we're all stuck. Medium term, immigration standards will be tightened in all desirable countries.

A better alternative might be to drop back to part-time work <$70K and setup a side-business.

It’s wait and see what this government does with taxation. Didn’t the col already rule out CGT and income tax increases again a few weeks ago. Trusts may be a target. Duties, tighten rules around income deprivation, entitlements to rest home subsidy etc. easy target and predominantly impacts weathy.

IMO increasing tax on higher income earners is the most fair way of increasing tax. People on these huge wages , don't need to earn all this money, but they can afford to pay a bulk of it in taxes. Also collecting tax on these big overseas companies that hardly pay any tax in NZ is something they must do.
Wealth taxes IMO are a bad idea, they discourage people to save, and people will find way to get round them.Instead it encourages people to spend If it came in, then they would need to do it on houses, including the family home as that is where many people sink their savings.

Aka... future tax payers bail out as always. Lucky to those in collective private loan/deb - this F.I.RE scheme is the overall scheme which being steered into 'too big to fail category' - whatever the scheme you may call it? - it's remain the same essence - an overall tax payers bail out.

Here we go again!
Wealth tax to be suggested to bring in revenue for a government that is delighting in giving away money to make themselves look like Robin Hood!
Why did they decide to pay out 3 months in one go to anyone and everyone that applied!
I know where a business was given out well in excess of $140k to a business that had not even opened!!!!
How on earth does this happen?
They also said it was $585 per week!
This was a gross figure and needs tax,KiwiSavef, ACC levies etc. taken off it!
Wealth tax will never be brought in just like CGT won’t be!
Far easier to raise GST to 17.5% as then everyone can pay not just the people who actually make this country run!!

Who do you think actually makes this country run? Just for our clarity?

Agreed, few peoples to run the country and take away money into their pockets. We all in agreements basically the past 30years the few losses must be carried out by the masses & nothing should change with regards to it. Finance companies, GFCs. I'm glad this lot already borrow more from overseas, loan more, subsidy more (no one can deny that first beneficiary of this wage subsidy is landlords & banks) - we should keep it that way, in order to keep the flame of our F.I.RE economy. Orr's followed my suggestion to cut it by 75, another will follow suit, GST? naa 20% is good number I reckon.

As far as I can remember the FIF regime was dreamt up by Cullen under the Clarke government. The subsequent National government did nothing to change, improve, repeal it. Today ordinary Kiwisavers are the victims of this weird regime.

Always enjoy Terry's contributions. The temporary loss carry back suggestion sounds gobble-d-gook to me. Surely there is a simpler version we could use. Why do we make things so complicated?

QE will be the initial play. Expect “The New Deal” to roll out soon funded by Government Bonds that are kept afloat by RBNZ. They’re keep the Ponzi scheme going for as long as it takes. Austerity is the last thing we need.

The issue with the Foreign Investment Fund regime rules is yet another reason why asset taxes based on imaginary income are a terrible idea (like the TOP party's insane risk free rate of return tax / wealth tax).

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