Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021

If you need more information about this Act, please contact the administering agency: Inland Revenue Department
  • Sections 4, 135(25), and 203 corrected on 29 April 2021 under section 25(1)(j)(iii) and (v) of the Legislation Act 2012.
99 New subpart IB inserted (Carrying forward companies’ loss balances: continuity of business activities)

(1)

After subpart IA, insert:

Subpart IB—Carrying forward companies’ loss balances: continuity of business activities

IB 1 Purpose

The purpose of this subpart and sections GB 3BA to GB 3BAC (which relate to arrangements involving tax losses) is—

(a)

to enable companies to carry forward tax loss components in loss balances despite not meeting the requirements for continuity of ownership of section IA 5 (Restrictions on companies’ loss balances carried forward: continuity of ownership), in order to reduce impediments to—

(i)

innovation and economic growth:

(ii)

corporate reorganisations:

(iii)

changes in the direct or indirect ownership of companies:

(iv)

companies accessing new sources of share capital:

(v)

companies adapting their business activities in order to grow or be resilient; but

(b)

not to encourage tax avoidance arrangements involving the acquisition of ownership interests in companies.

Defined in this Act: business, company, loss balance, ownership interest, tax avoidance arrangement, tax loss component

IB 2 Meaning of ownership continuity breach

In this subpart, an ownership continuity breach, for a company, means a breach of the requirements for continuity of ownership of section IA 5 (Restrictions on companies’ loss balances carried forward: continuity of ownership) that, if met, enable a tax loss component of the company to be carried forward in a loss balance.

Defined in this Act: company, loss balance, ownership continuity breach, tax loss component, tax year

IB 3 When tax loss components of companies carried forward despite ownership continuity breach
When this section applies

(1)

This section applies when an ownership continuity breach occurs for a company.

Tax loss components for earlier income years carried forward

(2)

Despite the ownership continuity breach, a tax loss component arising in an earlier income year is carried forward to a tax year in a loss balance under section IA 3(4) (Using tax losses in tax year) if—

(a)

the earlier income year is the 2013–14 income year or a later income year; and

(b)

the company does not cease to carry on business activities during the relevant period described in section IB 4 (the business continuity period); and

(c)

no major change in the nature of the business activities carried on by the company occurs during the business continuity period, other than 1 or more major changes that are permitted under subsection (5); and

(d)

subsection (3) does not apply to prevent the tax loss component being carried forward to the tax year.

Tax loss components for earlier income years not carried forward

(3)

The tax loss component is not carried forward to the tax year if—

(a)

before the beginning of the business continuity period,—

(i)

the business activities carried on by the company have ceased; and

(ii)

the business activities have not been revived:

(b)

the earlier income year is the 2020–21 income year or a later income year and the company has had another ownership continuity breach—

(i)

since the beginning of the earlier income year; and

(ii)

in relation to which the requirements of subsection (2)(b) and (c) for the carrying forward to the tax year of the tax loss component are not met:

(c)

the earlier income year is before the 2020–21 income year and an ownership continuity breach occurred for the company in the period—

(i)

beginning on the first day of the earlier income year; and

(ii)

ending on the last day of the 2019–20 income year.

Major change: factor that must be taken into account

(4)

For the purposes of subsection (2), without limiting the factors that may be taken into account in determining whether a major change in the nature of the business activities carried on by the company has occurred during the business continuity period, the extent to which the assets used in deriving the company’s assessable income have remained the same or similar over the business continuity period must be taken into account.

Permitted major changes

(5)

A major change in the nature of the business activities carried on by the company during the business continuity period does not breach the requirement set out in subsection (2)(c) if the major change is—

(a)

made to increase the efficiency of a business activity carried on by the company:

(b)

made to keep up to date with advances in technology:

(c)

caused by an increase in the scale of a business activity carried on by the company, including as a result of the company entering a new market for a product or service that it produces or provides:

(d)

caused by a change in the type of products or services the company produces or provides that involves the company starting to produce or provide a product or service using the same, or mainly the same, assets as, or that is otherwise closely connected with, a product or service that the company produced or provided immediately before the beginning of the business continuity period.

Avoidance arrangements

(6)

Section GB 3BA (Arrangements for carrying forward loss balances: companies’ business activities) may apply to treat a company as not meeting the requirements of subsection (2).

A definition

(7)

In subsection (5), asset does not include land other than buildings and fixtures.

Defined in this Act: assessable income, asset, business, company, income year, land, loss balance, ownership continuity breach, tax loss component, tax year

IB 4 Business continuity period
Period

(1)

The period referred to in section IB 3(2)(b), for an ownership continuity breach and a tax loss component of a company, is the period beginning immediately before the ownership continuity breach occurs and ending on,—

(a)

for a company for which the amount calculated using the formula in subsection (2) is 0.50 or greater, the last day of the income year that corresponds to the tax year in which the company uses the tax loss component; or

(b)

in any other case, the earlier of—

(i)

the last day of the income year that corresponds to the tax year in which the company uses the tax loss component; and

(ii)

the last day of the income year in which the fifth anniversary of the ownership continuity breach falls.

Formula

(2)

The formula is—

(bad debt deductions – bad debt repayment income) ÷ (total deductions – bad debt repayment income).

Definition of items in formula

(3)

In the formula,—

(a)

bad debt deductions is the total amount of deductions that the company has been allowed under section DB 31(3) (Bad debts) for income years between the 2013–14 income year and the income year corresponding to the tax year immediately preceding the ownership continuity breach, both income years inclusive, in which a tax loss component included in the company’s tax loss for that tax year arose:

(b)

bad debt repayment income is the total amount of income that the company has under section CG 3 (Bad debt repayment)—

(i)

for income years between the earliest and the latest of the income years described in paragraph (a), both income years inclusive; and

(ii)

that relates to deductions that the company has been allowed under section DB 31(3):

(c)

total deductions is the total amount of deductions that the company has been allowed for the income years described in paragraph (a).

Defined in this Act: amount, company, deduction, income, income year, ownership continuity breach, tax loss, tax loss component, tax year

IB 5 When group companies treated as single company

Companies that are part of the same group of companies immediately before and immediately after an ownership continuity breach occurs for each of the companies are treated as a single company for the purposes of this subpart and sections GB 3BA to GB 3BAC (which relate to arrangements involving tax losses).

Defined in this Act: company, group of companies, ownership continuity breach

(2)

Subsection (1) applies in relation to a breach of the requirements for continuity of ownership of section IA 5 if the breach occurs during the 2020–21 income year or a later income year.