Loss continuity rules to change
Well, it has taken almost a year since the suggestion was first made (admittedly there have been some distractions) however, the proposed changes to the loss continuity rules, which will see the introduction of a ‘same or similar business’ test, are about to be legislated.
You will all be aware, that the present rules require a shareholding continuity test of 49% to be satisfied for a company to retain its accumulated tax losses and carry them forward to the following income year. So, to put it in plain English speak, 49% of those who owned the company in the income year that the loss was made, still have to be around in the income year that the company wishes to claim that loss against profits now derived – the continuity period. Breach the continuity rules (which has been known to occur when your client does things without talking to you first!) and the losses are forfeited – plain and simple.
For as long as I can remember, our cousins to the west of us, have used a ‘same or similar business’ test to determine a company’s ability to carry forward losses to subsequent income years. Our powers that we had been considering for a little while already as to whether we should adopt a similar approach, and certainly the arrival of Covid on our shores early in 2020 provided the necessary motivation to progress any proposed change with more urgency.
Consequently, in April 2020, recognising the risk to corporate taxpayers that the pandemic may have, with the need for companies to be able to source new capital urgently and that such share restructuring may result in loss forfeiture as continuity thresholds were breached in order to ensure the survival of the entity, the Government announced that the continuity rules would be changed and that the amendments would be in place in respect of the 2020/21 income year.
As they say, there’s nothing like leaving things to the last minute, however legislation will be introduced in a supplementary order paper to the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Bill, which itself was just reported back to Parliament last week.
So under the new rules, provided the underlying business of the company continues post the shareholding change, the ability to continue to carry forward accumulated tax losses will be unaffected. Naturally I am sure that once the legislation is in place, we will see some narrative from the Revenue as to the meaning of the term ‘same or similar’, however in the first instance you can obtain some guidance from the Q&A fact sheet that was released in conjunction with the Minister’s statement.
Note that the existing 49% continuity rule will not be replaced by the new business continuity test (BCT as it will be known), instead the two rules will work in tandem, in practice the BCT not requiring further consideration unless the company has clearly progressed an ownership change of more than 49%.
Also some take-outs from the fact sheet (its only three pages so you can probably spare the time to read it yourself):
- No similar change proposed to the group loss-offset rules (so still based on 66% shareholding commonality)
- No change to the imputation credit shareholder continuity requirements
- BCT must be maintained until end of income year 5 years post breach in shareholding continuity
- Only losses incurred from 2013-14 year onwards will be able to be carried forward under the BCT
Finally, no word yet (that I’ve seen at least) on the loss carry-back rules and the plan to make this regime more permanent, however I guess they do have more time to play around on this issue.
Foreign trust remedials feedback sought
Tax Policy is requesting your feedback in relation to some remedial work is it proposing in respect of the foreign trust disclosure rules which were enacted in the Taxation (Business Tax, Exchange of Information, and Remedial Matters) Act 2017.
Since the enactment, a number a legislative errors or unintended consequences have been discovered, including:
- The definition of ‘foreign trust’ is not aligned with the requirements for the foreign-sourced income exemption in ss CW 54 and HC 26 of the Income Tax Act 2007
- A power to deregister trusts does not exist
- The term ‘in the business of providing trustee services’ is not defined and may be confusing
- Certain information may not be required for new settlors of, or beneficiaries with fixed or final interests in, a foreign trust
- There is no requirement to update annual return information when it changes
- Testamentary trusts do not have trust deeds and cannot qualify for the foreign-sourced income exemption in s CW 54
- The foreign trust disclosure rules in the TAA are not included in the Income Tax Act definition of ‘trust rules’
- The Commissioner has no discretion to allow the foreign-sourced income exemption where the foreign trust was not registered at the relevant time
- The penalties have not been updated to reflect the 2017 requirements and are not fit for purpose
- References to a minor beneficiary’s age should instead refer to their date of birth
Again it is a relatively brief document (eight pages) if you would like a better understanding behind the anomalies identified, and if you would like to have your say, the deadline from comment is 23rd March 2021.
Child support amendment Bill finally reported back
It’s been a long time coming, first introduced to Parliament on 11th March 2020, however the proposed legislation has gained traction again, being reported back on 4th March.
The Bill is aimed at reducing complexity, improving fairness, increasing compliance with the Child Support Act 1991, and improving IR’s administration of the scheme. Facilitating the changes is arguably the move of child support to IR’s new systems and processes as part of IR’s Business Transformation programme – certainly time will tell in this respect.
The main proposals contained in the Bill are:
- Simplifying the penalty rules
- Introducing automatic deductions of financial support from source deduction payments made by employers to newly liable parents
- Introducing a time bar of four years on reassessments of child support for past years
- Including interest and dividends in child support assessments for salary and wage earners, and moving from taxable income to net income which will prevent carried forward tax losses lowering income for child support purposes
- Making technical amendments to assist with the administration of the scheme
Income Tax Bill reported back
Last week also saw the Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Bill (273-2) being reported back to Parliament by the Finance and Expenditure Committee.
The Bill has as its primary focus the topics of:
- Feasibility expenditure
- Purchase price allocation
- Unclaimed monies
- Other policy changes
- Remedial measures
- Miscellaneous matters
No doubt once the legislation is passed, we will see some sort of special report issued by the Revenue, however since a lot of water has passed under the bridge since it was first introduced in June last year, just a brief narrative as a reminder to you all of some of the changes which will be introduced.
The feasibility expenditure changes are all targeted to removing potential ‘black hole’ type expenditure, where not all such expenditure is currently fully deductible (the Trustpower case certainly highlighted this point recently) and could therefore act as a disincentive for businesses to invest. Under the amendments, expenditure incurred in developing assets where no completed asset eventuates, will be able to be spread over a five-year period, unless the quantum involved is less than $10k, in which case an immediate deduction will be available.
For those of you who regularly deal with the land taxing provisions, you will appreciate that when it comes to relying on the residence exclusion, there is a carve-out where a person has a regular pattern of buying and selling land (‘regular pattern restriction’). Up until now however, the scope of the carve-out was relatively narrow, to the extent it could be avoided by using either a different owner or what was done to the land argument, which then broke the ‘pattern’ element. The amendments will certainly widen the carve-out, to include ‘groups of persons’, who have ‘significant involvement’ with each other.
Finally, with respect to sales of commercial property, businesses, and other bundles of assets entered into on or after 1 April 2021, new purchase allocation rules will apply. The purpose of the proposal is to require a buyer and seller to make the same allocation of the total purchase price to the different assets (or classes of assets) sold. For example, in a purchase of commercial property, the proposal requires that the seller and buyer allocate the same amount to the land, the building, and the fit-out. The proposal requires parties who agree an allocation between themselves to follow that allocation in their respective tax returns. If they do not agree, the vendor may notify an allocation to the buyer and the Commissioner. The allocation binds both the vendor and the purchaser. If the vendor does not make an allocation within two months of the transaction, the purchaser can notify an allocation, which binds both the purchaser and the vendor.
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