Your company can only carry a loss forward if there has been shareholder continuity through the continuity period. This happens if at least 49% of voting shares do not change hands throughout the year the loss was made as well as the year it'll offset income.
If you want to carry losses forward for several years in a row you'll have to check shareholder continuity for each year.
If one of the shareholders of your company is another company you may have to work out the voting interests of the people who own the shareholding company. You will not have to do this if your company has more than 25 non associated shareholders or if the shareholding company holds less than 10% of your company.
Part year loss offsets
If your company does not meet the shareholder continuity test it generally will not be able to carry a loss forward. However, if a shareholding change occurs part way through a year you may be able to claim the loss.
To do this you need to make a part year offset by filing a companies income tax return for the period up to the shareholding change. You'll need to provide adequate accounts for the part year.
Shares with different voting rights
If your company has shares with different voting rights you'll have to calculate each shareholder’s voting interest based on their shareholder decision making rights.
The four issues a shareholder may have decision making rights in are:
- the constitution of the company
- a variation in the capital of the company
- the appointment of a director.
Shares may be worth 25%, 50% or 75% of shares that allow voting on all 4 issues.
Calculating voting interests
Bike City Limited has 200 shares on issue. 100 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 100 B shares. Bill's B shares only give him the right to vote on company decisions related to dividends.
Someone’s voting interest is:
(% of the company’s shares they hold giving the right to vote on dividend decisions + % constitution + % capital + % director) ÷ 4
Wendy's voting interest is:
(50 + 100 + 100 + 100) ÷ 4
= 350 ÷ 4
Bill's voting interest is:
(50 + 0 + 0 + 0) ÷ 4
= 50 ÷ 4
Market value circumstances
The voting interest requirement of the shareholder continuity test does not apply if your company has a market value circumstance, such as:
- the company having 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 having on issue a share on which the payment of a dividend is guaranteed by another person
- certain options over the company’s shares being on issue.
Instead, the company can only carry a loss forward if shares with a market value of at least 49% don’t change hands during the continuity period.
Claiming the loss
To claim the loss from a tax year you will have to file an IR4 that lists your loss in the net loss to carry forward. In the following year’s IR4 this will be the loss brought forward, which reduces the company’s income and the amount of tax it has to pay.
This amount may have to be adjusted if:
- audits or voluntary disclosures cause changes in the net loss to carry forward
- the losses were used to pay shortfall penalties
- loss offsets were made after the return was filed.