- Small business simplification and compliance
- Feasibility expenditure
- Loss continuity
While it feels like a lifetime ago, there were several key items recommended by the Tax Working Group that CA ANZ has been monitoring. COVID-19 and the current tax bill has enabled some of these items to be progressed.
Small business tax compliance and low-value asset write-offs
This is an area of reform we strongly supported, along with other measures to simplify compliance for small businesses. CA ANZ would like to see the NZ$500 temporary write-off threshold retained. However, the permanent increase from NZ$500 to NZ$1000 is a step in the right direction.
Reducing compliance costs for small businesses was a key consideration in our submissions to the Tax Working Group and one of the areas it identified for immediate action was an increase in the provisional tax threshold to NZ$5000 of residual income tax. This was another ‘win’ provided as part of the COVID-19 response and is estimated to remove 95,000 taxpayers from the provisional tax net.
There are several regimes remaining that could be simplified to help SMEs. While compliance issues (such as simplifying the entertainment regime) and simplifying FBT is on the Tax Policy Work Program, the COVID response has slowed progress and it remains to be seen how these items will be prioritised next year. CA ANZ had also called for a reduction in the number of depreciation rates, or a simplified depreciation regime for small businesses. To date, no progress has been made.
Commercial building depreciation
CA ANZ agreed with the Tax Working Group’s assessment that, based on evidence from other jurisdictions, commercial buildings do, in fact, depreciate. At a minimum, CA ANZ felt that deductions should be introduced to support seismic strengthening costs following the Christchurch and Kaikoura earthquakes, and called on the government to consider reintroducing depreciation on commercial and industrial buildings. We were pleased to see government act on the latter in response to COVID-19. The jury is still out on deductions for seismic strengthening costs.
While reintroducing building depreciation (at either 2%DV or 1.5% SL from the 2020-21 income year) comes at a fiscal cost, it assists with short-term business cash flow and supports long-term investment.
If you watched this year’s NZ Tax Roadshow, you would have heard our senior tax advocates discussing the long-running saga that is feasibility expenditure. The two recent (and crucial) developments were the inclusion of a provision for businesses to claim a tax deduction for unsuccessful or abandoned assets as the only tax measure of the 2020 Budget, and the inclusion of feasibility expenditure in the current tax bill.
CA ANZ is pleased to see a simple and low compliance cost approach for smaller businesses included in the bill, allowing for qualifying expenditure of up to NZ$10,000 to be immediately deductible in the current year. For larger feasibility projects, businesses will be able to claim a deduction spread over five years.
However, the bill also states “the expenditure must satisfy the general permission requirements, in that the taxpayer must have an existing income-earning process and to which the expenditure must have sufficient nexus. The capital limitation, however, is overridden.” This could be a roadblock for start-ups or businesses looking to expand into new areas if the feasibility expenditure isn’t considered to be tied to an existing income-earning process.
The proposed feasibility amendment will apply (if enacted) to qualifying expenditure incurred in the 2020-21 and later income years.
It’s not too late to catch up!
Watch the recording of the Roadshow here.
The Tax Working Group observed that current loss continuity rules may not work well for start-up businesses that require equity capital to grow. Loss carry forward rules currently require 49% continuity of ownership from the time the losses are incurred to when they are used; and are calculated over the lowest common shareholding over the period. While the Minister of Revenue signalled late last year that proposals were coming and continuing work on this item was confirmed again during COVID-19. It’s worth noting that the proposed change announced during COVID-19 was for consultation on a ‘same or similar business test’ rather than a full reform of the loss continuity rules. Work will need to get underway quickly to introduce the required legislation in time if this proposal is to apply from the 2020-21 income year.
Our expectation is that a ‘same or similar business test’, or a similar modification recognising difficulties with the Australian model (from which this was proposed to be based on) would be introduced as a secondary test to the loss continuity threshold. The introduction of a ‘same or similar business test’ to supplement existing shareholder continuity requirements for the 2021 income year will also assist businesses to restructure and seek additional funds via capital raising. This will enable losses to be retained for future use, something that hasn’t been possible previously where significant new equity capital has been needed – often stifling growth potential.
While it wasn’t a key focus of the Tax Working Group, COVID-19 has also seen the introduction of a temporary loss carry-back scheme.