IRD have introduced a loss carry-back scheme to support customers during the current uncertain economic environment.
Businesses making a loss in either the 2020 year or the 2021 year can use that loss to offset profits they have previously made. The loss is carried back to the preceding income year.
In the preceding income year, tax is paid on profit. With the loss carried back, tax that has already been paid on prior year profits, may be refunded.
This scheme does not apply to residential rental property deductions which are ring-fenced from 1 April 2019.
This scheme is unlikely to provide any immediate cash relief to business owners. Instead, it may decrease future tax payments, and a wait and see approach is required. This is because the outcome of the financial year ending 31 March 2021 needs to determine.
Case Study 1
ABC Limited made a profit of $100,000 for the financial year ending 31 March 2020. During the year, they have already paid $20,000 of provisional tax, and have terminal tax to pay of $8,000 due 7 April 2021. Total tax of $28,000, being 28%.
In the 2021 financial year, ABC Limited makes a loss of $20,000. This loss can be offset against the 2020 profit. Under the loss carried back scheme, the 2020-year profit would be adjusted to $80,000, and tax at 28% or $22,400 is due. Instead of ABC Limited having $8,000 of tax due on 7 April 2021, the amount is now $2,400.
In the example above, there is no cash relief to the business owner; they still have tax to pay, but the amount is reduced taking into consideration the 2021 loss.
Case Study 2
Continuing the example above if the loss in the 2021 year was $40,000, the loss carried back scheme would result in the 2020-year profit being $60,000, and tax at 28% of $16,800. ABC Limited would be due a tax refund of $3,200 (as they have already paid $20,000 during the 2020 provisional tax year). This provides a (cash) tax refund to the business.
Are you going to make a loss?
If you think your business will make a loss or you are currently experiencing cash flow difficulties, please contact us to discuss options available immediately. This may include utilising the loss carry-back scheme as outlined above, the wage subsidy exemption, or the government loan – small business cashflow scheme. We are here and available to help.
Contact Tim Doyle or Jane Evans today for a no obligation phone call or meeting on 07 823 4980 or email us. Our office is in Cambridge, NZ, but distance is no problem. We have many international and national clients.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.