Tax Debt Fitness Coach & Financial Therapist
Tax Debt Management Specialist
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01
Business Continuity Test
IS 22/06, 11/12/2022
Company Tax Losses Carried forward up until the 31st March 2020
Up until the 31st March 2020, companies could only carry forward losses to future years, under the condition that at least 49% of the voting shares have not changed during the period when the loss was incurred. This requirement is called the shareholder continuity test.
Traditionally the shareholder continuity test was put in place to stop taxpayers entering into tax avoidance schemes such as buying existing companies just for their tax losses.
Example 1 – Tax Losses Carried Forward of $350,000
Bob holds 100 Ordinary Shares in ABC Limited and has tax losses carried forward from 31st March 2019 of $350,000.
On the 1st May 2019, Bob finds a new investor for his business. Mary buys 60% of Bob’s shares for $250,000. This leaves Bob owning 40 Ordinary Shares and Mary now owns 60 Ordinary Shares.
As there has been a change of shareholding in the 2020 year of more than 49% percent, all the Tax Losses brought forward from the 2019 are not lost due to the change in shareholding.
Business Continuity Test
During the Covid 19 pandemic, some companies were struggling financially and were looking at raising additional share capital to be able to stay in business. The intention of the government was to help these businesses by allowing companies to be able to raise additional capital from new investors without them losing their prior years losses.
Following the passing of the Taxation – Annual Rates for 2021 -2022 and Remedial Matters Act 2022, the Business Continuity Test has now been passed into law applying for the 2021 Income years onwards.
While this change in legislation was carried out during the Covid 19 pandemic, it wasn’t a temporary change and now applies for the 2021 year onwards.
What are the main conditions of the Business Continuity Test?
The main condition to satisfy the Business Continuity Test is that the taxpayer’s company must continue to operate substantially the same business activity over the next 5 years after the change of business ownership has occurred. In addition to this, to be eligible for the business continuity test, the company still needs to be carrying on a business activity prior to the shareholding change and can’t have ceased trading.
Therefore, if your company has large tax losses and you are looking to restructure your business, provided your company meets the business continuity test, you will still be allowed to offset the company’s losses against future profits, despite a change of shareholding of more than 51%.
The Business Continuity Test only applies to tax losses from the 2013-2014 year onwards. Losses prior to this can’t be carried forward and will be lost if a change in shareholding more than 49% occurs.
Example 2- Tax Losses Carried forward of $400,000
Adam holds 100 Shares in Snoop Dog Limited. The company owns a Café in Auckland and due to the Covid 19 Pandemic, has tax losses as at 31st March 2021 of $400,000.
Adam wants to semi-retire from operating a Café and decides to sell 80% of his shares to Lucy on the 1st May 2021. After the change in shareholding, Adam owns 20 ordinary shares and Lucy owns 80 Ordinary Shares.
Lucy wants to continue to operate the Café and plans to increase the efficiency of the business by using an online app to take coffee orders from their regular customers. After the design of the online app, the café makes a profit for the year ended 31st March 2022 of $25,000.
Because the business hasn’t substantially changed, the company meets the business continuity test and is still allowed to utilize the tax losses from the 2021 year. This leaves the company with a taxable profit of $Nil for the 2022 year and tax losses to be able to be carried forward to the 2023 year of $375,000.
Please Note: there are other conditions that you must satisfy the business continuity test and I strongly recommend seeking taxation advice first before making any shareholding changes to your business.
If your company has tax losses and you are looking to either restructure or sell your business, please contact me first before making any changes to your business as you may benefit from this new change in legislation.
02
Tax Debt and Money Shame
https://www.psychologytoday.com/us/blog/where-science-meets-the-steps/201501/5-ways-silence-shame
When I meet clients, I sometimes sense that they feel ashamed about their tax debts and the situation that they find themselves in and they come across as being reluctant for someone else to help them.
What is money shame, how can it affect you and how I can help?
According to Karen Reivich and Andrew Shatte's Book, the Resilience Factor, shame is related to the beliefs of being a bad person. Often we blame ourselves for the decisions or mistakes that we made in past . This can be a barrier for us to either seek professional help at the time that we need it most, prevent us from changing our financial behaviors or worse still, hiding information from the professionals that we do seek advice from.
Shame as an emotion is different from guilt. You feel guilty from something that you have done (an action that you took), whereas with shame, you feel bad about your character and the person that you are.
If we feel guilt, it may bring about a positive change. It informs us that we have made a mistake and we might offer someone an apology for our actions, try to make amends or just try to do something differently next time.
Shame however doesn't bring about a positive change. It is a self-destructive behavior and so unhelpful. It often comes from our upbringing and culture, beliefs and the environment that we grew up in.
Sometimes people hold on tight to the feelings of shame, almost as a self-induced punishment for their past mistakes.
Money Guilt is when you made a mistake with your money and you now realize that the actions that you took were wrong and you have now accepted your consequences of your actions.
Money Shame is thinking that you are just bad with money and you continue to blame yourself for what has happened.
If you feel shame about not paying your taxes and not being able to contribute to society, perhaps it is not really your fault. A lot of businesses have been badly affected by Covid 19 in NZ and given the scale of the pandemic, it is normal to be affected in some way.
Part of you is still feeling mad at yourself still for your mistakes and that anger may be holding you back.
Only can you start to forgive yourself, can you begin the healing process, accept what has happened and be ready to move on.
If you think that shame is holding you back from tackling your tax debts, call me to talk about it.
A big thanks to Dr Megan Mccoy, Professor of Practice & Director of the Personal Financial Planning Master's Program at Kansas State University for helping me to write this article.
03
Money is Taboo : What can we do about it? Talk!
I recently got told that going to a see a financial therapist was like "financially stripping naked in front of your accountant, it might be a helpful experience, but you only go once and never to return"
One of our biggest problems about money is the belief that money is a Taboo subject and it isn't allowed to be spoken about. Often we feel anxiety, shame or embarrassment when we have to talk about money. A study done in America found that couples would even prefer to talk about sex or marriage infidelity than talking about how much they earn or how to manage the family finances.
Money as it is deeply connected to Maslow's Hierarchy of Needs. (Food and Clothing, Safety & Security, love and belonging, esteem and self-actualization) and therefore money can easily become an emotionally charged subject. We need money to satisfy our basic needs of food & clothing and safety and security. Without money in today's society, we would find it difficult to survive.
People tend to avoid speaking about it as they don't want to be judged, told what to do or compared with others. Contractually as employees, we are not allowed to tell our colleagues how much we earn.
In a relationship, money can be used to control others, where the enabler offers money to family members with strings attached. Children can be exposed to messages about money that are inappropriate for their young age that they psychologically can't cope with. Worse, still is if they are used as "human shields" when the debt collectors come calling and being told to tell them that mum or dad are not at home.
In a marriage, money is one of the leading causes of divorce as partners don't talk to each other about their finances, one of the spouses controls all the money or couple keep money secrets from each other, a money disorder known as financial infidelity.
To begin to start to develop a healthy relationship with money, you need to start to talk with your partner about your finances and be open and honest about your financial situation. Only when you can talk with each other in a constructive manner without the fear of criticism or judgement, can you have a open dialogue and talk about things in a peaceful manner.
If things become heated, take a break from the conversation, go and do something else and ask your partner at a later time when it is a good time to talk about your family finances.
If you are experiencing problems talking about money ? Contact me to arrange a money health check.
04
Kiwisaver - Were you tricked into saving for your retirement?
Nudge by Cass Sunstein & Richard Thaler
In our grandparents day, (those brought up in the 1930's and 1940's), the primary vehicle for saving for their retirement was the defined benefit plan (or better known as simply an employer pension scheme. When they retired, their pensions were paid by their employer over their lifetime based on a specific guaranteed retirement benefit amount. As the employer was the one responsible for managing the plan, if the amount invested in the retirement fund was not enough to pay the retired employees pensions, the employer would be required to top up the pension from they own funds.
Today we have shifted to a defined contribution plan (like Kiwisaver), where ourselves as employees take on the responsibility and risk of saving for our own retirement and not our employer. If we save enough for our retirement depends on the choices that we make, how much we contribute, the length of time that we have to save for our retirement, the type of Kiwisaver fund that we choose and how risk averse we are.
In their famous book, Nudge , Cass Sunstein and the Noble Prize Winner, Richard Thaler, developed Nudge Theory. They introduced the controversial idea that the Government and even private companies can unconsciously influence our behavior and change how we make decisions by changing the environment around us even if we are not aware that someone else has indirectly led us to make that decision for ourselves.
A classic example of a Nudge, is painting a fly onto the men's urinals. After introducing painted flies onto the urinals, the behavior of the men using the toilets changed. They tend to have a better aim when using the toilet and research has shown that the cost of cleaning restrooms is reducing after introducing this nudge.
Another nudge would be to replace chocolate with fruit and vegetables at supermarket checkouts in an effort to combat obesity. Shoppers would end up buying more fruit and vegetables simply because its more convenient for them rather than going all the way to the other end of the store to pick up some chocolate.
Therefore how someone designs their store or where they position their products can unconsciously influence our buying habits.
Similarly, psychologically we tend to view the default options as being the normal or mostly accepted option. The human brain has to make so many daily decisions that as a result of evolution, we have become cognitively lazy, conserving our energy for making important decisions such as the event of danger or perceived threat. That is why we always prefer to take the easy option and try to avoid making decisions that take up a lot of energy or are difficult.
It is psychologically proven that if you make something difficult for someone to do, they are less likely to do it, whereas if you make it easy, they are more likely to do it.
By automatically enrolling everyone into Kiwisaver, it is an example of a nudge. As it is difficult to opt out or people were too lazy to elect to opt out, a greater portion of people ended up being enrolled. If not being enrolled in Kiwisaver was offered as the default choice, less people would have become enrolled.
While I don't disagree that it is important to be able to save for our retirement, I'm not sure about the Government using psychology to influence the number of New Zealanders who have become enrolled in the scheme.
I believe that in America with their 40IK Plan (also a defined benefit plan), there is a automatic escalation option that increases an employees contributions at the rate of 1% each year up to a rate of 15%. Whilst we don't have this option in New Zealand, it could help people to unconsciously save more for their retirement.