What’s in it for me?
Not a lot. There were no new tax announcements in Budget 2021, so we couldn’t tick off any items on our wish-list.
This is not surprising given recent tax changes that implement the Government’s policy including the extension to the bright-line rule, the new proposed interest limitation rule, the 39 percent tax rate applying to income of individuals in excess of $180,000 from 1 April 2021.
There has been a significant amount of tax changes over the past 12 months including many COVID-related measures that have mostly been tax-payer friendly. It’s likely that the speed and amount of tax changes over the next 12 months will continue unabated. So while there’s not much to report on the tax front in Budget 2021, the message here is ‘watch this space’.
Importantly, Budget 2021 confirms the Government’s commitment to excluding “new builds” from the recent changes to the bright-line test from 5 to 10 years and the proposed new interest limitation rule. Officials are working on the “new build” definition and the proposed new interest limitation rule, and a discussion document is due out shortly.
Tax Loss Carry Forward - Business Continuity
One of the last COVID-19 relief measures to be enacted was the proposal to allow tax losses to be carried forward when there has been a breach of shareholder continuity, but the business has continued without major change.
The purpose of the rules was not to punish a company with tax losses who had to reorganise, restructure, innovate, pivot and access new capital which would ordinarily have resulted in a breach of the 49% shareholder continuity requirement and forfeiture of brought forward losses.
Originally intended to be based on the Australian same or similar business test this carefully drafted legislation allows tax losses where there has been a breach in shareholder continuity after 1 April 2020 but there has been no major change in the nature of the business activities carried on by the company.
It applies to a pool of tax losses incurred from the 2013/14 income year onwards where there has been no breach of continuity prior to the start of the 2020/21 income year.
Helpfully to provide greater certainty, changes which might ordinarily look like a major change in business are specifically allowed where the major change is:
- to increase efficiency of business
- to adapt to advances in technology
- caused by an increase in scale of a business activity including entering new markets or introducing new products or services, or
- caused by a change in the type of products or services but the same assets are used to produce or provide those products or services.
The legislation includes appropriate base protection measures to prevent trading in tax loss companies where there would be the purpose of avoidance. This includes specific measures which applies to dormant or inactive companies, deliberate changes in business activities prior to acquisition and specific boundaries for the injection of income post a change in continuity.
Inland Revenue released a draft Interpretation Statement on 17 May 2021 which is open for comment until 28 June 2021.
Please contact your BDO advisor if you would like to know more.