Could a tax loss carry back be next on the Government’s COVID-19 agenda?

At the end of 2019, we were seeing a lot of businesses forecasting significant growth in their profits. Now that we’ve entered into a national lockdown – which is unquestionably the right thing to do – the impact on businesses is unprecedented.

The Government’s series of new tax changes to help business in these difficult times are obviously welcome. They include measures to decrease the number of provisional taxpayers, the ability to write off use of money interest, allowing fixed assets of up to $5,000 to be written off when purchased rather than depreciated over time, bringing forward the improved rules for refundability of R&D tax credit incentives, and the reintroduction of depreciation on nonresidential buildings.

The asset write offs and depreciation allowances will give taxpayers more deductions from the 2021 income year. But as COVID-19 grinds a lot of businesses to a halt, they may not need them as they could already be in losses. This may mean that these businesses won’t see a cash benefit from Inland Revenue’s initiatives for a number of years.

Tax losses may be carried forward indefinitely and set off against future profits. There is an additional requirement for companies that 49% of the shareholders stay the same. But for the tax losses to be useful, there has to be a future profit.

The COVID-19 tax measures should help businesses when they are hurting now. So why not allow businesses to carry their losses back instead of forward?

It would deliver immediate relief if businesses could carry tax losses back to prior years. If companies made a profit in the prior year and paid tax, this would give them a tax refund to help with their cashflow sooner.
A number of countries in the OECD including Canada, France, Germany, Ireland, the Netherlands, the United Kingdom and the United States already allow some form of tax loss carry back to prior years. The ability to carry losses back is generally limited to one year and can be limited to certain types of businesses. The United States allows up to two years, and Canada three years.

A tax working group in Australia considered introducing a loss carry back regime in 2012 and recommended that this should proceed, however, it is yet to be implemented.

In New Zealand, the tax working group recommended changes to the loss carry forward rules in 2018. Before this global pandemic reared its ugly head, Inland Revenue was due to release proposals on the loss carry forward rules – so the time is right to prioritise this.