Tax due diligence when buying or selling
Currently, if an asset is purchased for less than $500 it does not need to be depreciated. The cost is immediately deductible in the year of purchase. This ‘low-value asset’ threshold has been temporarily increased from $500 to $5,000 for assets purchased in the 12 months from 17 March 2020. The threshold will reduce to $1,000 for assets purchased from 17 March 2021.
Tax depreciation on industrial and commercial buildings has been reintroduced for the 2021 tax year and onward. The diminishing value rate will be 2%, while the straight-line rate will be 1.5%. This is a permanent measure which will have a fl ow-on eff ect and improve the balance sheet of some large companies through the partial reversal of deferred tax liabilities.
The residual income tax threshold, which determines whether a taxpayer has a provisional tax obligation has been permanently lified from $2,500 to $5,000 for the 2020-21 income year and onward. This is expected to remove 95,000 taxpayers from the provisional tax regime, assisting cashfl ow and compliance related issues faced by individual taxpayers and small businesses.
Taxpayers aff ected by COVID-19 that are unable to physically or fi nancially make tax payments will not be charged use of money interest (UOMI) on late payment of taxes from 14 February 2020. However, taxpayers will need to demonstrate to IRD that they have been “signifi cantly adversely aff ected”. IRD is further off ering taxpayers the opportunity to set up instalment arrangements to meet outstanding tax liabilities to those facing diffi culty in paying outstanding amounts. Amendments to the Tax Administration Act 1994 have been made to give IRD greater discretion over its ability to allow extension of due dates and filing timeframes for taxpayers aff ected by COVID-19.
Changes to the tax loss continuity rules will be introduced. At present, an enyity is only able to carry forward tax losses if shareholder continuity of 49% is maintained from the time a loss amount is incurred, until it is utilised. A ‘same or similar business’ test has been proposed, whereby a business can carry forward tax losses provided it continues to operate in the same or similar way, irrespective of a change in ownership. This test is being modelled on the current Australian loss carry forward rules. The change is targeted at taxpayers who are seeking new capital to stay afloat, without tax losses being forfeited due to a change in ownership. A ‘same or similar business’ test aims to instil confidence in prospective investors as to future cash-flow benefits from utilising the current period losses against future profits.
Finally, the extension of the new R&D tax credits rules to companies that incur tax losses, initially intended to be enacted effective from the 2020-21 tax year, has been brought forward to the 2020 tax year to allow timely access to the regime.
The package contains a number of measures designed to provide cashflow advantages. Hopefully there is something for everyone.