IRD has introduced a temporary loss carry-back scheme to support businesses anticipating a loss as a result of COVID-19.
The loss carry-back scheme allows businesses expecting to incur a loss in either the 2019/2020 or 2020/2021 tax years to carry the losses back one tax year to offset profits and have previously paid tax, instead refunded.
Currently tax losses can only be carried forward to offset future profits so this scheme allows the losses to be utilised sooner and therefore faster cashflow relief for businesses in loss during the period affected by COVID-19.
The scheme applies to almost all taxpayers – companies, trusts and individuals. Shareholder employees are eligible to use the scheme where provisional tax is paid on the basis of receiving a shareholder salary from a company which is not in fact paid because the company’s pre-salary income is offset by a loss carry-back.
To be eligible for the scheme, a taxpayer must have, or expect, a loss in 2019/2020 or 2020/2021 (the net loss year), and have taxable income in the previous year (the taxable income year). Losses can only be carried back one year.
In summary this means:
- Losses for the 2019/2020 year can be carried back to the 2018/2019 year; and
- Losses for the 2020/2021 year can be carried back to the 2019/2020 year
The amount that can be carried back is the smallest of:
- The estimated loss before adjusting for the carry-back; or
- The taxable income in the previous year before adjusting for the carry-back
Estimations come with a risk so should be considered carefully: Standard late payment use of money interest applies if the loss carry-back is overestimated. Taxpayers are also not able to use the COVID-19 remission of penalty provisions to have this interest remitted.
Taxpayers are able to claim a refund of overpaid taxes from utilising the loss carry-back scheme by either:
- re-estimating provisional tax where the income year is the 2019/2020 year or ;
- amending their tax return where the income year is the 2018/2019 year
Re-estimates are allowed up to the earlier of the day the 2019/2020 tax return is filed or the day it is due for filing (generally 31/3/2021 for taxpayers with a tax agent).
Any refund owing as a result of the loss carry-back scheme will not be offset against any other taxes due to IRD. In other words, it is available as a cash refund.
This is good for those businesses who need cash, and have money tied up in tax deposits at the IRD.
If you think that you may be a candidate to consider this scheme, or would like to know more, please do not hesitate to contact one of our team to discuss.