Government Backs Business with Loss Carry Back Scheme, Changes to Continuity Rules, and Commercial Lease Support
Government backs business through COVID-19
We see this as strategic by the government because support via the tax system ensures that only businesses that were actually profitable before and paying tax will be able to get any tangible benefit from the measures.
By far and away the most important announcement is the Loss Carry Back scheme.
Loss Carry Back Scheme
The announcement is short on detail with its legislative backing still to be written and released on 27 April.
This is what we do know.
Businesses that are forecasting a loss now in 2021 will be able to forecast this loss and incorporate it into the profit calculation they have for the 2020 year.
This is a temporary measure allowing carry back one year.
The concession ensures firms will not have to carry losses in 2021 forward but can instead gain a tax saving from them in 2020.
Many firms in this position are currently scheduled to make a 3rd installment provisional tax payment for 2020 on 7 May.
It is this payment that requires a decision in the short term.
This example may help illustrate the decision.
A consulting business with a large contract that has typically made $100,000 profit each year and paid $33,000 in tax, spread over three installments of provisional tax of $11,000 each is scheduled to pay its 3rd installment of $11,000 on 7 May for the 2020 year.
The business had finished 2020 well and had indeed generated $100,000 profit. In early April 2020 the business was advised that due to Covid the contract was suspended. It is therefore certain that in 2021 the business will make a loss.
The government’s announcement now means that the forecasted loss in 2021 can offset the profit already made in 2020.
This means that the business which has already paid $22,000 in tax toward its 2020 obligation should not now make its 3rd installment.
The announcement also means that once the business has been able to forecast the loss, it will be able to apply to have some or all of the $22,000 provisional tax it has already paid refunded.
IRD have confirmed that businesses in this position do not need to rush to re estimate their provisional tax position before 7 May.
They have said that the proposed law change “will allow re estimates to be lodged after the 7 May date”.
Logistically, we see this as both essential and pragmatic as it will allow businesses to apply the carry back provisions once they are in a position to actually forecast their 2021 position.
As we stand, the ability to make accurate forecasts for most businesses still hinges on when we move out of level 4 lock-down and what level 3 actually looks like.
You do not need to act in haste to prepare the estimate. This should be done once you are in a position to assess the impact.
Loss Continuity Rules
The government also announced changes to the loss continuity rules that currently require a company to maintain a 49% continuity of ownership if they are to carry forward historic losses. This announcement appears to be designed to make it easier for companies needing capital from new investors to gear up in a post lock-down economy.
Whilst we support this initiative, we see it as having a much smaller impact for SMEs than the loss carry back announcement.
Commercial Lease Support
Landlords have been hoping for assistance, perhaps via packages that might have supported tenants to maintain commercial lease payments but have today had their hopes dashed.
The government’s initiative with respect to support for tenants has been to simply extend the period before which a landlord could terminate a tenancy for rent arrears. On the other end of the scale, lenders have also had the period of time extended under which action for loan default can occur.
This announcement will come as cold comfort to landlords, especially those obligated under their lease agreement to enter negotiations with their tenants and make reasonable concessions for tenants locked out of premises.
We are learning that the norm where leases require landlords to negotiate reasonable concessions is a 50% reduction in rent but that every case must be negotiated on its merit and impacts, and arrangements do vary.
Commercial landlords though will be eligible for the loss carry back rules if the concessions offered are of a magnitude and a duration that would mean that losses could eventuate in 2021.
We are also disappointed that the government is heralding mortgage holidays as an antidote for the pressure’s landlords are experiencing. Mortgage holidays simply mean that repayments are suspended. No lenders have yet offered any actual concession on interest charges and many have still obligated borrowers to retain the same term of their loans which will mean larger loan payments when the repayment holidays are lifted to make up what was not paid during the “ holiday”.
It is becoming clear that this government is in effect expecting landlords, both residential and commercial, to provide the cushion their tenants need to get through COVID rather than providing any tangible benefit themselves or by requiring banks to make any real or material concessions on lending costs.
Finally, a reminder that Withers Tsang has its entire team working in the cloud and our move to paperless cloud-based systems last year ensures that we can continue to meet client needs whilst working remotely.
Please get in touch with us if you need advice, support, forecasting assistance, or help with COVID relief packages.
Or visit us at www.wt.co.nz or phone 09 3768860 to speak to one of our Partners.
