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Treatment of loss

       For individual: a tax loss can be offset against assessable income in the current year or carried forward and offset against income of future years (s BC(4), IA2(2), IA3(4)).

       For partnership: a tax loss is ‘distributed’ to each partner according to shareholding. The loss can be carried forward to next year and offset against the partner’s assessable income.

       For a trust: loss incurred by a trust are carried forward and offset against trustee income of future years (s IA3(4)).

       For a look through company: a tax loss can offset against shareholders’ income within LTC. It can be carried forward and offset against future income the LTC allocates to the particular shareholder.

 

Companies’ tax losses

 

       1. Carry the net loss forward: a company can carry net loss forward into the next income year provided the company satisfies the continuity of shareholder test. The company must maintain at least a 49% continuity of ownership throughout the continuity of the ownership period.   

 

    2. Offset the loss with a group company: a company can distribute the loss to a related company which is a member of the same group companies. The two companies will form a group where there is at least 66% commonality of shareholding between all members of the tax group at the time the loss was derived.

 

    3. Offset or refund for foreign dividend payment (FDP): a company can use its loss to satisfy a liability the company may have to pay FDP or to obtain a refund relating to FDP in a corresponding year.

 

    4. Shareholder continuity: the continuity percentage are measured by adding the lowest or minimum voting or market value interests carried by shares held by shareholders during the continuity period.  A voting interest is the percentage of the total shareholder decision-making rights (s YA1). For example:

 

Shareholder

Shareholding beginning of the year

Shareholding end of the year

Lowest percentage

Saurav

25%

40%

25%

Sandy

70%

25%

25%

Yifan

5%

35%

 5%

Aggregate of common voting or market value interest

   

55%

 

The aggregate of common voting or market value interest is the sum of their lowest shareholding during that period, which is 55%. The shareholder continuity was not breached, so the  company can carry forward its loss. 

 

Part-year net losses may be carried forward where the continuity requirements are satisfied for only part of a continuity period. As long as the financial statements show the parts of the net loss and net income that are fairly attributable to that part of income year when the continuity requirements are satisfied (s IP3).

 

     5. Company grouping: Where two or more companies have common voting and market interests that are at least 66% they may be treated as a group (s IC3). Where there is a 100% common voting and market interests, the companies will be a wholly owned group. Dividends paid between companies in a wholly owned group are exempt from tax (s CW10)

 

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