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Question: New loss carry-back scheme for businesses
Co A was, up until recently, in good financial health. It is expecting to return $800,000 in net income for the year ending 31 March 2020. Co A has already paid $124,000 in provisional tax installments and has a final provisional tax payment of $100,000 due on 7 May 2020.
As a result of the COVID-19 lockdown, Co A has temporarily halted its business activity (although it is still paying staff and rent for its premises). Last week the directors met and are projecting a loss for the next financial year ending 31 March 2021. Although the projections are estimates at this stage, it looks like Co A will have a tax loss in the range of $400,000 to $600,000 for the 2020/21 year.
Does the recent Government announcement about the loss carry-back scheme affect Co A's final provisional tax payment for the year ended 31 March 2020?
The Government's recent announcement on the loss carry-back scheme could affect Co A’s final provisional tax obligation. The detail of the new scheme has not been revealed at this stage. The Government has indicated that this legislation is currently being drafted and will be introduced to Parliament the week of the 27th of April 2020.
Based on the information that the Government has been released, Co A would be able to alter its third provisional tax payment. If Co A adopts the income projection for the 2020/21 year at the lower end of the scale (ie estimates that it will make a $400,000 tax loss and thereby reducing its exposure to UOMI if the loss is overestimated), it can carry back this loss to the 2019/20 year and re-estimate its income for the year to $400,000 (down from $800,000). Because it has already paid $124,000 in tax, it pays nothing on May 7, and receives a refund of $12,000 from its earlier provisional tax payments.
In summary then, Co A returns $400,000 of income for the 2019/20 year and pays $112,000 tax, receiving back its earlier payments as refunds.
Inland Revenue states on its website that:
"Taxpayers do not need to rush to re-estimate their provisional tax before 7 May. Part of the proposed law change would make it possible for them to re-estimate it after the date of the final installment. This will give them more time to work out any estimated loss for the 2020/21 income year. While we aren’t able to answer questions before the law passes, we encourage businesses to raise with us any issues they want to see addressed in the legislation or administrative guidance. You can email us at firstname.lastname@example.org
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