Article

Loss carry back rules – is it too late to get the benefit?

Tax Alert - May 2021

By Hiran Patel
 

If you are considering the application of the loss carry back rules, then it’s time to act as the 2021 income year is the last opportunity to use this concession.

The introduction of the temporary loss carry back rules was part of the Government’s response to the impacts of the COVID-19 outbreak (see our article at the time the rules were introduced). This was a positive initiative from the Government, however this measure was only intended to apply to businesses being in losses for the 2020 and 2021 income tax years.

The Government had indicated an intention to develop a permanent loss carry-back mechanism to apply from the 2022 income year onwards, but this has been put on hold due to fiscal concerns.

To recap on the eligibility requirements, a taxpayer must have made or anticipate they will make a loss in either of the 2020 or 2021 income years. The taxpayer must have a profit in the year prior to the loss year. Given tax returns for the 2020 income year should already have been filed, the remaining option available to taxpayers is to carry a loss from the 2021 income year back to the 2020 income year.

Given the temporary rules have been in place for a year, we have seen some practical issues as follows:

  • Ease of making elections: A key benefit of this temporary regime was the ability to elect through the 2020 income tax return process for losses to be carried back to the 2019 income year. Now that the filing deadline for 2020 income tax returns has passed, if an anticipated loss for 2021 was not already factored into the 2020 tax return, until the 2021 tax return is filed the only method to access an anticipated 2021 tax loss is to undertake a section 113 request in relation to the 2020 tax return. While not explicitly clear in the enacted legislation, Inland Revenue has also indicated that taxpayers should make an election to use the mechanism through the myIR portal.
  • UOMI exposure: Many taxpayers would have been able to carry back losses from the 2020 income year to the 2019 income year using finalised loss positions for 2020. However, taxpayers carrying back 2021 losses to the 2020 year through the income tax return process may have been using forecasted losses for 2021. This creates an exposure to use of money interest from the first provisional tax instalment date in the 2020 year if forecasted 2021 losses turn out to be incorrect. While it was possible to re-estimate the 2021 loss carry back once an election was made, this was only able to be done before the 2020 return was filed or by the due date for filing (which has now passed). As a result, taxpayers who have carried back losses based on forecasted results should be mindful of the election made during the process of preparing their 2021 tax position, and should look to use tax pool intermediaries if they have overstated their loss carry back position.
  • Group of companies: Where taxpayers have a group of companies and tax losses can be offset, then this requires consideration prior to a loss carry back election being made. The ordering rules require losses to first be offset against profits in the group in the current year (e.g. 2021 losses should first be applied to any 2021 taxable income of group entities). Following this, once the quantum of losses to be carried back have been calculated, the loss entity is first required to carry back its losses to be offset against its own taxable income in the prior year. If excess losses are still available, then the excess loss can be offset against the taxable income of other group companies in the prior year. Inland Revenue have a loss carry back grouping template which can be used as part of the election process to assist with applying the ordering rules.
  • Imputation credits: Refunds are only available to the extent the taxpayer (if a company) has sufficient imputation credits at the date of the most recently ended tax year, so it’s important to check your imputation credit account balance before using these rules. As losses can only be carried back one year, if a refund of provisional tax was obtained from filing the 2020 return, then this would also impact on the imputation credit account balance.


Conclusion

The introduction of these rules during the COVID-19 pandemic was a great initiative, however, taxpayers should be prudent when looking to use these rules to ensure they are correctly applied, and that UOMI risk is mitigated. Given the rules are only applicable for losses in the 2020 and 2021 years, taxpayers will have until the filing date of 2021 returns of 31 March 2022 (provided they have an extension of time) to make use of this initiative.

Contact your usual Deloitte advisor for more information.

May 2021 Tax Alert contents

Did you find this useful?