Deductions for Covid-19 disrupted businesses
IR has released a draft interpretation statement on income tax and GST deductions for businesses whose operations have been disrupted by the Covid-19 pandemic.
Referenced PUB00393, the commentary explores whether, in the Commissioner’s eyes, taxpayers whose businesses have either downscaled or ceased to operate, can continue to claim income tax and GST deductions in relation to expenditure incurred post the happening of one of those events.
The draft view presented is that an income tax deduction will usually be allowed where a business has downscaled or ceased operating temporarily, however not where a business has completely ceased, even if it is possible that the business may restart later.
The potential grey line therefore, will be determining whether a cessation is considered ‘ ‘temporary’, or whether a downscaling has been to such a degree that it is actually indicative of a cessation – naturally each case will be fact specific in that regard. Additionally it will be important to be able to establish when a business has ceased (not temporarily), as any expenditure incurred post this point in time is unlikely to be deductible.
A potential fishhook can also arise where the business completely changes direction due to the impacts of Covid-19, as costs incurred that are preliminary to or preparatory to the start of a new business will often not be deductible due to the capital limitation.
The income tax focus of PUB00393 is on the words ‘carried on’ in a business context, which references naturally to the leading New Zealand case decision on the issue, of Grieve v CIR (1984). From the principles outlined in Grieve’s, two are then given some focus in the commentary, being the ‘intention to make a profit’ and the ‘nature of the activities being carried on’.
The Commissioner acknowledges that it may not always be clear at the time of actual certain events whether a business has ceased, however that by the time the relevant income tax returns are due for filing, there may be greater clarity in this regard – to the extent that deductions can be apportioned accordingly.
From a GST perspective, the issue becomes whether the registered person has ceased their taxable activity, which is a different test to that undertaken for determining the ‘carrying on of a business’. The focus now will be on whether the person’s activities satisfy either the ‘continuous’ or ‘regular’ elements of the taxable activity definition contained within section 6. Consideration will also need to be given to any specific Covid-19 relief variations e.g. COV 20/09 (short-term accommodation
converted to long-term for expected periods of less than 18 months), or the more specific statutory reference in section 52(3) that IR should not cease a person’s registration if it is expected that any further taxable activity will be carried on within the next 12 months.
In a GST context, if the taxable activity is deemed to have ceased, certain expenditure incurred in connection with the ending of the taxable activity should still be deductible. Additionally, a deregistration adjustment will be triggered in relation to the market value of any assets of the taxable activity retained by the taxpayer at the date of cessation.
Finally, the draft interpretation contains eight useful examples, which set out IR’s views on the income tax and GST consequences arising for the taxpayer for each fact specific event.
Should you wish to have your say on PUB00393, the deadline for comment is 28th May 2021.
This article from the ‘A Week in Review’ newsletter was originally published Monday 27th April 2021. If you have any questions or would like a second opinion on any national or international tax issues, please contact me firstname.lastname@example.org.
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