A Week in Review

Removal of Two Expansion Barriers

The Government has just released its Economic Plan, supposedly a one-stop-shop for business and government agencies to view the Government’s long-term plan and see how different policies contribute to it. In the latest version, identified as economic shifts required for a more productive, sustainable and inclusive economy, including a need to:

• move the New Zealand economy from volume to value with Kiwi businesses, including SMEs, becoming more productive;
   
• make deeper pools of capital available to invest in infrastructure and to grow New Zealand’s productive assets;
   
• develop a sustainable and affordable energy system; and,
   
• utilise New Zealand’s land and resources to deliver greater value and to improve environmental outcomes.

To support its Economic Plan and the numerous shifts identified as now being required, accompanying the document release were two tax-related, ‘removing barriers to expansion’, proposals.

The first has been kicked around a bit in the community already, public consultation recently having been sought on the present rules associated with the deductibility of feasibility expenditure, which is seen to potentially restrict investment in exploring new assets or business model due to the costs often being non-deductible for tax purposes.

As a result of feedback received, particularly from infrastructure companies, it is proposed (to be included in the next taxation Bill likely to be tabled in Parliament early 2020) that qualifying expenditure totalling less than $10,000 would be deductible immediately, or otherwise still be fully deductible but have a five-year spreading rule. The new rules would equally apply to expenditure incurred on projects that did not end up going ahead.

The second proposal could effectively see a modification to the existing R&D tax-loss cash-out rules applying usually to start-up companies, which were introduced to deal with the risk of tax loss forfeiture due to breach of shareholder continuity requirements as these entities brought new investors on-board to assist with much-needed cash flow funding.

These shareholding continuity rules, which require a minimum 49% of shareholders who incurred the initial loss to still be present when the company wanted to use the losses in a future income year, have remained in place throughout the various phases of legislative tinkering, however all that may change soon, with the Government likely to commence consultation with business and tax experts before the end of the year, to determine how the continuity rules might be amended in order to facilitate the risk these start-ups face when attempting to attract new investment.

Depending on the outcome of the consultation process, changes to the shareholder continuity rules could potentially make the need for a tax loss cash-out regime redundant, and consequently, we could see repeal or modification of those rules accordingly.