Strange Times & Stranger Tax Planning

As a chartered accountant with 30 plus years business experience, I applaud the Government’s quick response to COVID-19 which has provided relief for Kiwi businesses.  But the quick response has also created a few snake pits!

Snake Pit One (aka The Wages Subsidy)

The wages subsidy was announced quickly and Government’s (aka tax payers) cash was released accordingly.  For businesses receiving a lump sum payment of thousands, or even hundreds of thousands of dollars, in March before incurring significant financial hardship it almost felt like Christmas!

The sting in the tail came later when “non-essential” businesses closed, and financial reality set in.   Reality such as receiving the 12 week wages subsidy in advance of having to pay staff and overheads, and incurring 3% Kiwisaver contributions and future debt in the form of 8% accrued holiday pay for those employees supposedly being “paid by the Government” via the wages subsidy.

The wages subsidy was a great initiative to avoid immediate redundancies and keep Kiwis in their jobs.  But it wasn’t free cash as many business owners initially thought.  It was rushed, and the thinking/implementation reflected that.

Snake Pit Two (aka Tax Loss Carry Back)

A Tax Loss Carry Back scheme was announced recently.  At the time of writing this blog the legislation has not yet been passed so there is still insufficient detail, and the final payment for 2020 provisional tax is due next week.

Historically, if a business makes a profit this year then it pays tax.  If the business makes a loss next year, then it carries that loss forward to any offset future profits before it pays any further income tax.

Under the proposed Tax Loss Carry Back scheme you will be able to use a loss incurred this year to claim back tax paid on profits earned last year.

While I have no issues with that policy, it appears the legislation may go further… if you expect that you will make a loss this coming tax year then you could apply for a refund of tax paid or payable on last year’s trading profits!  In other words, you would be able to apply for a tax refund in advance of, and in the expectation of, incurring a tax loss.

Trying to accurately predict how a business will perform over the next 11 months is tricky!  While most are expecting tough times ahead the Tax Loss Carry Back scheme may encourage negative thinking and planning to access a tax refund now.

Making less taxable profit this year than last year (say you earned $500k last year, but only earn $5 in the coming year) will feel like a loss.  But from an accounting and tax perspective, you still made a profit of $5 and would not be able to access the tax loss carry back scheme.  We can expect penalties and interest if tax is claimed back under the scheme, but the business turns out to be profitable.

In my opinion tax policy should encourage businesses to be profitable.

It’s a case of “Be careful what you wish for”.

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