Date posted: 19/04/2021 5 min read

Continuity changes a win for innovating businesses

We learnt last year that our best mechanism for recovery from COVID-19 is for New Zealand businesses to grow our way out. But until now, for many businesses looking to grow our tax settings were an impediment.

In Brief

  • Government has introduced a business continuity test to assist businesses who have breached the shareholder continuity test, but have not undergone a major change
  • The business continuity test applies from the 2020-21 and later income years

We learnt last year that our best mechanism for recovery from COVID-19 is for New Zealand businesses to grow our way out. But until now, for many businesses looking to grow, innovate and raise capital our tax settings were an impediment.

Chartered Accountants Australia and New Zealand have been calling for and working with Inland Revenue on changes to New Zealand’s loss continuity rules over the past several months. We’re pleased to see the introduction of the business continuity test as a last-minute addition to the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act.

The business continuity test

The business continuity test was enacted as part of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act on 30 March 2021.

The business continuity test applies from the 2020-21 and later income years and acts as a secondary test permitting loss carry forward if there is a breach in ownership continuity of a company if there is no major change in the nature of the business activities of the company. The Act contains several measures to prevent loss trading.  

Subpart IB subsection (5) of the Act details a ‘ permitted major change’:

Permitted major changes

(5) A major change in the nature of the business activities carried on by the company during the business continuity period does not breach the requirement set out in subsection (2)(c) if the major change is—

(a)

made to increase the efficiency of a business activity carried on by the company:

(b)

made to keep up to date with advances in technology:

(c)

caused by an increase in the scale of a business activity carried on by the company, including as a result of the company entering a new market for a product or service that it produces or provides:

(d)

caused by a change in the type of products or services the company produces or provides that involves the company starting to produce or provide a product or service using the same, or mainly the same, assets as, or that is otherwise closely connected with, a product or service that the company produced or provided immediately before the beginning of the business continuity period.

The loss continuity problem: previous tax treatment

Prior to the recently enacted changes, New Zealand’s loss carry forward rules require 49% continuity of ownership from the time the losses were incurred to when they were used, calculated over the lowest common shareholding over the period.

If you were a new business seeking capital to grow, or to explore new products, retention of tax losses that require 49% continuity of ownership could severely impact your decision-making – did you seek additional capital, and with it, new shareholders, or keep your shareholding the same and to offset any losses your business might make against future, more profitable years?

These rules worked well for established businesses that suffered a loss in one year, to reduce their future tax liabilities but did not support an innovative and growing business environment.

Related reading

Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act

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