New Zealand’s temporary loss carry-back scheme offers a new way for taxpayers to claw cash back into their account.

Announced as part of the tax relief measures on 17 March 2020, Inland Revenue’s loss carry-back scheme is a temporary measure that allows taxpayers to offset current (or expected) losses in either the 2020 or 2021 year against tax paid in the previous year. This is a fairly unique prospect; ordinarily when a taxpayer makes a loss, that loss can only be offset against future profits. The temporary loss carry-back scheme turns this on its head.

The net result of this policy should be to put cash in the taxpayer’s bank account, by refunding some amount of tax already paid to Inland Revenue. However, offsetting future losses against historic profit is not without its risks.

The scheme and its limitations

The core challenge with the loss carry-back scheme is its requirement that taxpayers estimate their losses in order to claim them against the prior year (if such losses are not based on an already filed return). Estimating losses this way comes with a few key drawbacks.

The first is that lodging an estimation will result in the taxpayer opting out of the uplift regime. The uplift regime is generally preferable for taxpayers, being concessionary in nature. Opting out of uplift also means losing ‘safe harbour’ protection from interest for those taxpayers with less than NZ$60,000 tax to pay.

Secondly, over-claimed losses will need to be repaid with interest. The extent of any over-claimed losses will become clear when filing the tax return for the current period. If the return shows a smaller loss than what was estimated, the difference will be owed back to Inland Revenue.

Another drawback is that this loss will be apportioned across all three provisional dates for that prior period. With Inland Revenue’s use-of-money interest rates running at 7-8%, this could get expensive.

Finally, any loss will only be carried back to the extent a company holds sufficient imputation credits with respect to any refund claimed (as per the existing rules for companies obtaining tax refunds). Taxpayers may not be able to carry back losses where last year’s profits have been paid out as dividends.

Clearly, the loss carry-back scheme will not work for everybody.

How tax pooling can make it all worthwhile

When coupled with the tax loss carry-back scheme, Inland Revenue’s tax-pooling framework mitigates the risk of over-estimating losses and provides maximum flexibility for those businesses with deposits in a tax pool.

1. Mitigate the cost of overclaiming losses

Tax pooling allows taxpayers to reinstate any over-claimed tax refunds at a significantly reduced cost compared to Inland Revenue’s prevailing use-of-money interest rates. Generally speaking, tax pooling will reduce the interest owing on this reinstated tax by 35% to 45%. In effect, this enables taxpayers to be more bullish when estimating their current period losses, knowing they have reduced the cost associated with any miscalculation.

2. Stay in uplift by withdrawing deposits

Taxpayers who have deposited their prior year tax payments into a tax pool can access the tax loss carry-back scheme without ever needing to make a formal provisional tax estimate for that prior year to Inland Revenue. Taxpayers can therefore have the flexibility of staying within the standard uplift regime by using tax pooling.

Prior-year deposits in the tax pool can be withdrawn without any need to inform Inland Revenue (or seek their authorisation). Withdrawing these deposits will require only a simple anti-money laundering check at most. In addition, these taxpayers can file the return for their current, loss-making period as they usually would. Once filed, they are left with a final amount claimable under the loss carry-back scheme.

3. Get cash out without expecting a loss

Finally, tax pooling enables businesses to get their prior year tax back regardless of whether they are expecting losses for the current year. This means taxpayers who want more cash on hand can withdraw their tax pool deposits at their own discretion.

For those who need money but also need their prior year’s tax, there is the Tax Trader’s Deposit Offset option. This allows the pool to release deposits back to the taxpayer with an agreement to reinstate those deposits later on at a small cost (presently about 4% per annum or less).

The loss carry-back scheme is a welcome addition, but to get the most out of it, taxpayers are encouraged to use tax pooling. In fact, paying tax through a tax pool is a universally better choice, regardless of whether you are forecasting losses.

This is particularly true in light of the tax loss carry-back; tax pooling enables taxpayers to take advantage of all of the upsides of the scheme without falling out of the standard uplift, while also shielding taxpayers from the full cost of over-claiming any (prospective) losses.

“Tax pooling mitigates the risk of over-estimating losses and provides maximum flexibility for those businesses with deposits in a tax pool.”

What is tax pooling?

Inland Revenue’s tax-pooling framework gives taxpayers control over when and how they pay provisional tax – and saves them money.

Instead of paying directly to Inland Revenue, the taxpayer pays into a tax pool as cash becomes available through the year.

If they have underpaid at the end of the tax year they can buy tax to settle their liabilities, avoiding Inland Revenue late payment penalties and use-of-money interest.

If they have overpaid, they can earn premium interest by selling their excess. Tax Traders is an Inland Revenue-approved intermediary and all funds are securely held by the Public Trust.

Find out more

If you or your clients are considering the tax loss carry-back scheme, contact the tax pooling specialists at Tax Traders to discuss your best options.

Call 0800 TAX TRADERS (829 872) or email [email protected]