COVD-19’s latest victim: tax loss carry forward rules

During the early days of the COVID-19 pandemic, the Government advised that New Zealand’s rules relating to

carrying forward tax losses would be relaxed. The expectation being the economic effect of the pandemic

would see a number of businesses requiring new capital investme

nt, but acknowledging that tax losses should

not be forfeited as a result. This change has now been passed into law.

Historically, in order to carry forward a tax loss amount a company was required to maintain shareholding

continuity of 49% from the time a loss amount was incurred until it was utilised. The amendment passed at the

end of March 2021 introduces a


new “business continuity” test, not unlike Australia’s “similar” business test,

where losses can be carried forward provided the business operations fundamentally continue without “major

change”.



The concession applies when a change in shareholding results in a breach of continuity, and will enable a

company to continue to utilise its tax losses if there has been no “major change” in the company’s business

activities. This will no doubt be a matter of interpretation, but the key elements to focus on when determining

whether there has been a major change are:

 business processes,

 scale of business activities,

 use of suppliers or other inputs,

 markets being supplied,

 type of products or services supplied, and

 assets the business uses.


A change in one of these categories will not necessarily forfeit tax losses, as it depends on the scale of the

change in relation to the business.

To support the intention of increased business investment, a number of concessions have been provided for:

 Changes made to increase the efficiency of business activities.

 Changes made to keep pace with developing technology.

 Increases in scale, including a company entering a different market for its products or services.

 Changes to product/service type, provided it is similar to its existing offering.


The legislation applies to continuity breaches occurring in the 2020-21 and later income years. However, if

applicable, it can apply to losses incurred from the 2013-14 income year onwards. For example, a business that

had a shareholding change of more than 51% in their 2020 or prior income years will not be able to reinstate

any losses previously forfeited at the time of the breach, even if the business operations did not undergo a

“major change” at the time of the breach. However, if a business breaches shareholder continuity in its 2021

income year, and has tax losses arising from the 2015 year, it will be able to carry forward and utilise those tax

losses provided the business is not subject to a major change.

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