- Changes to help innovative small businesses and start-ups are coming
- The changes will affect feasibility expenditure deductions
- Loss carry forwards will also be included
Changes to help innovative small businesses and start-ups are coming.
The issues of feasibility expenditure (also called 'blackhole' expenditure) and the loss continuity rules have been long-standing headaches for New Zealand businesses, especially small and innovating businesses. Finance Minister Grant Robertson and Revenue Minister Stuart Nash have announced that feasibility and loss continuity rules proposals will be included as part of a Tax Bill to be released early next year.
CA ANZ has strongly advocated for changes to both issues as part of our response to the Tax Working Group and as part of our wider small business measures advocacy.
While the Tax Bill is a few months away, the Ministers' media statement suggests that these proposals are likely to take effect from 1 April 2020.
Feasibility expenditure deductions
CA ANZ has made several submissions to Inland Revenue, the Tax Working Group and Government in recent years regarding feasibility and black hole expenditure. As the rules currently work, taxpayers can claim a tax deduction for the exploratory work of a new asset or project only if that asset or project goes ahead. In our view, it is unfair that the same expenditure is not currently deductible if the project or asset is not found to be feasible. This discord disincentivises businesses from growing or innovating.
In our memorandum to the Tax Working Group ahead of its final report we urged the group, and Government, to consider implementing appropriate rules to ensure feasibility study costs are immediately deductible, or at least amortisable. As announced, the proposal for feasibility expenditure looks to make qualifying expenditure totalling less than $10,000 immediately deductible. The Ministers' statement then goes on to say that deductions will be able to be spread over five years. Given that taxpayers have been seeking certainty around feasibility deductions since the Supreme Court decision in Trustpower, this is a great result. The relatively short timeframe over which to spread feasibility expenditure in excess of $10,000 is also to be commended.
While the proof will be in the legislation, CA ANZ strongly supports the intent to keep these rules simple and to reduce compliance costs for small to medium sized businesses.
Loss carry forwards
Loss carry forwards require 49% continuity of ownership from the time the losses incurred to when they are used and are calculated over the lowest common shareholding over the period.
If you are a new business seeking capital to grow, or to explore new products, retention of tax losses that require 49% continuity of ownership can severely impact your decision-making – do you seek additional capital, and with it, new shareholders, or do you keep your shareholding the same and be able to offset any losses your business might currently be making against future, more profitable years? While the current loss continuity rules work well for established businesses that have suffered a loss in one year, to reduce their future tax liabilities the current rules do not support an innovative and growing business environment.
The Minister of Revenue has signalled an opportunity to consult on proposals for the wider retention of losses later this year and CA ANZ welcomes feedback from members. While the announcement doesn't give an indication of what the proposals may look like, CA ANZ sees a couple of possible options.
First, the continuity of ownership requirements could be relaxed to allow a lower percentage of shareholding to be retained.
Second, we could look to the methods adopted by other jurisdictions – including Australia – where a "same business test" is applied. This approach wouldn't be without its fishhooks, mostly in determining what constitutes being in the "same business". CA ANZ previously has recommended that this could be crafted to work for the majority of taxpayers by modifying it to a more practical "materially the same test". A "materially the same" test could apply where shareholder continuity has not been satisfied.
Changing these rules to make them more available to start-ups and growing businesses is a great step. CA ANZ also sees the possibility for these rules to be extended to allow loss carry back, which would further support innovative businesses.
Regardless of business size, the current rules require complex ownership/continuity calculations, any new rules must be simple for taxpayers to calculate and apply.