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Find out about: Tax rates and codes

When companies make losses

Note  
This information does not apply to look-through companies (LTC). Find out more about treatment of LTC losses or read our Look-through company (IR879) guide under "Forms and guides".

When a company has a loss

If a company's total expenses exceed its total income, it will generally have a loss for tax purposes. Companies in a loss position do not have to pay income tax.

Unless the company is a loss attributing qualifying company, the company will not be able to pass this loss to shareholders who are individuals.

Note  

Loss attributing qualifying companies (LAQCs) can no longer attribute losses to their shareholders from their first income year starting on or after 1 April 2011. This means in effect LAQCs no longer exist and will default to being taxed as a qualifying company (QC). Any losses the company has must be:

  • carried forward, or
  • transferred to a shareholding QC if certain requirements are met.

However, if certain requirements are met the company may be able to:

  • transfer the loss to another company or
  • carry it forward to the next tax year for offset against the company's income in that year.

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Carrying losses forward to future tax years

For a company to be able to carry forward a loss to a future tax year it must meet the shareholder continuity test. The shareholder continuity test will generally be met if there is a group of shareholders whose combined voting interest in the company during the “continuity period” is 49% or more.

The “continuity period” is the period from the beginning of the tax year in which the loss was incurred until the end of the tax year in which it offset. If a company suffers tax losses for several years in a row it will have to calculate its shareholder continuity for each year separately.

A shareholder's voting interest for the purposes of the shareholder continuity test is the lowest voting interest they had in the company during the continuity period.

Here is an example of how the shareholder continuity rules work:

Example 1

JPD Limited is owned by three brothers John, Paul and Dave. At the beginning of the 2009 tax year (1 April 2008) the voting interests in the company are:

John
50%
Paul
25%
Dave
25%
TOTAL
100%

JPD Limited incurs a loss of $100,000 for tax purposes in the 2009 income year. On 1 June 2009 (ie in the 2010 tax year) the brother's sister Sarah acquires John's shares. There are no shareholding changes after that date.

JPD Limited wants to know whether the loss of $100,000 can be offset against taxable income of $150,000 it earns in the 2010 income year.

Answer

JPD Limited will be able to carry forward the loss of $100,000 and offset the loss against the income it makes in the 2010 income year as the combined lowest voting interest of its shareholders was 50% during the continuity period.

 
Voting Interest
1/4/08
Voting Interest 1/6/09 onwards
Lowest Voting Interest
John
50%
0%
0%
Paul
25%
25%
25%
Dave
25%
25%
25%
Sarah
0%
50%
0%
TOTAL
100%
100%
50%

Shares with different voting rights

If a company has shares with different voting rights it will have to calculate each shareholder's voting interest based on their share of “shareholder decision-making rights”. Shareholder decision-making right means a right to vote on any of the following four issues:

  • dividends;
  • the constitution of the company;
  • a variation in the capital of the company; or
  • the appointment of a director.

Here is an example of how to calculate voting interests if a company has different types of shares on issue.

Example 2

Bike City Limited has two hundred shares on issue. One hundred ‘A' shares are held by Wendy. The ‘A' shares give Wendy the right to vote in all decisions the company makes. Wendy's father Bill has one hundred ‘B' shares. Bill's ‘B' shares only give him the right to vote on decisions of the company related to dividends.

Wendy's voting interest is:

Formula = % dividend + % constitution + % capital + % director
100 + 100 + 100 + 100

Voting interest = 50 + 100 + 100 + 100
                          400

= 87.5%

Bill's voting interest is: 

Formula = % dividend + % constitution + % capital + % director
100 + 100 + 100 + 100

Voting interest = 50 + 0 + 0 + 0
                         400

= 12.5%

Chains of Companies

To calculate a company's shareholder continuity you generally have to track the voting interests of the individuals who ultimately own the company.

Example 3

Mark and Deborah hold 50% each of the shares in Book Barn Holdings Limited. Book Barn Holdings Limited owns 100% of the shares in Book Barn Limited. To calculate shareholder continuity for Book Barn Limited you would track the voting interests of Mark and Deborah.

However, there are concessions for certain types of shareholder including shareholders who hold less than 10% of the company and companies with more than 25 non-associated shareholders.

If a company has a market value circumstance

Most companies can carry forward their tax losses if they meet the shareholder continuity test's voting interest requirement. However, if a company has a “market value circumstance” it will only be able to carry forward a loss if there is a group of shareholders whose combined market value interest in the company during the “continuity period” is 49% or more.

Situations where a company will have a “market value circumstance” include:

  • the company has on issue a profit-related or substituting debenture to which section FA 2 or FA 2B of the Income Tax Act 2007 applies
  • the company has on issue a share on which the payment of a dividend is guaranteed by another person
  • certain options over the company's shares are on issue.

If the company meets the shareholder continuity test

To claim the loss from a tax year a company will have to file an IR 4 return the next year. The loss from the previous year is called a “loss brought forward” and there are boxes on the IR 4 to enter the amount of the loss. This loss reduces the company's income and the amount of tax it has to pay.

Generally, the “net loss to carry forward” from the previous year's IR 4 return will be the “loss brought forward” in the next year's return. However, this amount may have to be adjusted if:

  • changes are made to the “loss to carry forward” figure as a result of audits or voluntary disclosures;
  • the company has used the losses to pay shortfall penalties or foreign dividend payments; or
  • the company has made loss offsets after the return was filed.

If a company fails to meet the shareholder continuity test

If a company fails to meet the shareholder continuity test for a tax loss it generally will not be able to claim the loss against its income or offset it to another group company. However, if the shareholding change occurs part-way through a year the loss may be able to be claimed if a part-year offset is made.

Find out more about part-year loss offsets.

When a company has failed to meet the shareholder continuity test in respect of the loss for a tax year this loss should not be entered in the loss brought forward box in the IR 4 return. If the company has failed the shareholder continuity test for all the losses it is carrying forward the amount that should be entered in the loss brought forward box is zero.

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Transferring losses to other group companies

A company can transfer its loss to another company if:

  • the companies meet the common ownership test;
  • the loss company meets the shareholder continuity test for the loss that is being transferred;
  • the loss company meets the residence requirements ie it is either incorporated in New Zealand or carrying on business in New Zealand through a fixed establishment, and is not treated as non-resident by reason of a Double Tax Agreement;
    • the loss transferred to the profit company is no greater than the profit company's net income; and
    • the payment and notification requirements are met.

Common ownership test

The common ownership test will generally be met if there is a group of shareholders whose combined lowest voting interest in both the loss company and the profit company is 66% or more during the “continuity period”. The “continuity period” is the period from the beginning of the tax year in which the loss was incurred until the end of the tax year in which it offset.

Here is an example of how the common ownership rules work:

Example 4

Kate owns 100% of both Cat Haven Limited and Dogs Retreat Limited. Three months into the 2010 income year she transfers 20% of her interest in Cat Haven Limited to Dot, and 25% of her interest in Dogs Retreat Limited to Lionel. No other changes are made to the ownership of the companies during the 2010 income year.

In the 2010 income year Cat Haven Limited makes a loss for tax purposes of $10,000 and Dogs Retreat Limited has net income of $12,000. Do Cat Haven Limited and Dogs Retreat Limited have sufficient common ownership for the loss to be transferred?

Answer

During the 2010 income year Kate has a minimum voting interest of at least 75% in each of Cat Haven Limited and Dogs Retreat Limited. As the minimum common voting interest of Kate exceeds 66% Cat Haven Limited can transfer its loss to Dogs Retreat Limited if the other loss offset requirements are met.

Chains of companies

To calculate whether two companies are commonly owned you generally have to track the voting interests of the individuals who ultimately own the companies.

However, there are concessions for certain types of shareholder including shareholders who hold less than 10% of the company and companies with more than 25 non-associated shareholders.

If the company has a market value circumstance

Most companies can transfer their tax losses to other group companies if they meet the common ownership test's voting interest requirement. However, if a company has a “market value circumstance” it will only be able to transfer a loss if there is a group of shareholders whose combined lowest market value interest in both the loss company and the profit company during the “continuity period” is 66% or more.
Find out more about the “market value circumstance” test.

Method of transferring losses

Losses can be transferred by either loss offset election or by subvention payment.

Loss offset elections

A loss offset election is an election made by the loss company to transfer losses to the profit company.
Loss offset elections must be made in writing. The loss company must give notice of the election by either:

  • completing the appropriate boxes in the IR 4 return; or
  • sending the Commissioner a notice of election in writing (manual or electronic).

A loss company has until the 31 March date that is the latest date it could file its IR 4 return for the income year to make its loss offset elections for that year. For example, a company with a 31 March balance date must make its loss offset election for the 2011 income year by 31 March 2012. Once made, loss offsets can't be reversed.

Find out more about loss offset elections.

Subvention payments

A subvention payment is a payment by the profit company to the loss company. A subvention payment reduces the profit company's net income and the loss company's available net losses for tax purposes by the amount of the payment.

To transfer losses by subvention payment the loss company must agree to receive a subvention payment from the profit company in return for the profit company bearing the loss company's tax loss.

The amount of the subvention payment can not exceed the amount of the loss company's loss.

The payment must be made by the 31 March date that is the latest date the company can file its IR 4 return for the income year which the subvention payment relates to. For example, a profit company making a subvention payment to a loss company for a loss in the year ended 30 June 2011 must make the payment by 31 March 2012.

Part-year loss offsets

When a shareholder continuity breach occurs part-way through an income year, the company may be able to offset losses from prior years against income earned in the current year before the breach.

To do this the company must:

  • file an IR 4 return for the period up to the breach; and
  • provide adequate accounts for the part-year.

A loss company may also be able to offset a loss suffered in the income year before the breach or in past years to another group company.

To offset a loss to another group company part-year, the loss company:

  • and the profit company must meet the common ownership test up to the date the offset is in relation to;
  • and the profit company must provide adequate accounts for the part-year the offset is in relation to; and
  • must make a valid election to offset the loss.

Find out more about part-year loss offsets.

 

 


Date published: 30 Mar 2011

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