A Week in Review

IR advises relief for affected parties

The week past saw the release of a number of communications from IR, offering relief to parties affected by certain current events, both local and international.

Firstly IR has recognised the potential effects of the Coronavirus COVID-19 on local businesses and has advised that tax relief and income assistance could be available to those affected in a number of different forms, whether it be by way of simply re-estimating provisional tax payments or by requesting early refunds of overpaid provisional tax, resulting from the business downturn. Further suggested relief options can be found at – https://www.ird.govt.nz/Updates/News-Folder/tax-relief-coronavirus.

Secondly, there has been the recent flooding in the Southland and Otago regions, which resulted in an Adverse Event being declared, which triggers the provision of Government support for farmers and growers in the affected areas. In this respect, IR has advised that it will exercise its discretion to allow both late deposits and early withdrawal from the income equalisation scheme. Farmers will have up to 30^th April 2020 to make their deposits in relation to the 2019 income year, although certain documentation must be provided in this regard, including a signed statement by either the farmer or the tax agent, evidencing how they were affected by the flooding.

Finally, in effectively a polar opposite weather-related scenario, a medium-scale Adverse Event for Northland and northern Auckland (north of the Harbour Bridge) has been declared in respect of the present drought impacts. As for their Southern counterparts, those Northern farmers affected by the droughts can either make late deposits or obtain early withdrawals, once they have also provided certain documentation to IR – the last day for deposits will also be 30^th April 2020.

Loss offset SPS finalised

IR has issued standard practice statement SPS 20/02, which explains the Commissioner’s practice in relation to loss offset elections between group companies. The SPS applies from 12^th February 2020 and replaces SPS 17/03.

The main take-outs from SPS 20/02 in my view were:

• Loss offset can be achieved via two mechanisms – offset election in the tax return itself, or by way of a subvention payment from the profit company to the loss company. Remember however that under the first option, the profit company will end up with un-imputed retained earnings, which may cause future income tax issues for the profit company when it looks to distribute those earnings to shareholders. Consequently my preference is always to sub vent the losses where possible.
   
• Remember that the shareholding continuity requirements (both the 49% and 66% thresholds) commence from the time the loss was incurred and continue until the losses are offset.
   
• With respect to subvention payments, have an appreciation of the term ‘payment’, which does not necessitate that there be a physical payment between the loss and profit companies, but can extend to scenarios where there is a valid discharge of obligations between the parties. So a journal entry that reduces an existing obligation owed by the loss company to the profit company, can amount to ‘payment’ for the purposes of the profit company’s obligation to the loss company under the terms of the subvention agreement.
   
• While an election notice ideally would refer to a specific dollar amount, the Commissioner will accept the use of a formula, provided the result of the formula could be known at the time of election – e.g. the tax loss to be offset is to be such an amount that would reduce the profit company’s net income to nil.
   
• The Commissioner will be prepared to exercise her discretion to accept late elections and grant extensions of time for filing them – i.e. a date past the usual due filing/payment date of the following 31^st March. This position is on the basis of the Commissioner being mindful of the purpose of the loss offset regime, which is to allow those companies that incur losses to utilise those losses even where different entities are involved. There should be similarity in the tax treatment of a group of companies, each carrying on separate enterprises, as compared with a single company that carries on the same enterprises in separate divisions. A case need not be exceptional for the discretion to be exercised favourably. The Commissioner will generally extend the timeframe required to make loss offset elections where a loss offset would be allowed

IR Public Rulings Work Programme

Want to know more about the focus of IR’s public ruling programme for the coming year? The latest update as at 7^th February 2020 can be located here – https://www.classic.ird.govt.nz/public-consultation/work-prog/.