Inland Revenue is seeking public comment on a draft position that a company can carry forward a tax loss arising in the same income year as an ownership continuity breach, provided the requirements of section IB 3 of the Income Tax Act 2007 are met.
New Zealand’s tax authority, Inland Revenue (IR), opened consultation on 16 October 2026 on an exposure draft, PUB00535 (Draft QWBA QB XX/XX), which clarifies how the loss carry-forward rules apply when ownership continuity is breached.
Titled “Income tax: Continuity of business activities – carrying forward losses arising in the income year of ownership continuity breach”, the draft is a “question we’ve been asked” (QWBA) prepared by the Tax Counsel Office.
The question and the answer
The draft asks whether a company can use the business continuity test to carry forward a tax loss component that arose in the income year in which an ownership continuity breach occurred. Inland Revenue’s brief answer is yes, if the requirements of section IB 3 are met.
Source of the uncertainty
Under section IA 5, a company can generally carry forward a tax loss component only if it satisfies the continuity of ownership requirements. Where they are not met, section IA 5(4) lets the company choose to apply section IB 3 to determine whether some or all of the loss component can still be carried forward.
The doubt arises from section IB 3(2), which refers to a tax loss component “arising in an earlier income year”. Since a breach can occur part-way through an income year, it was unclear whether the “earlier” year had to precede the year of the breach.
The commissioner’s interpretation
The commissioner of Inland Revenue considers that a court would prefer to compare the “earlier income year” with the tax year to which the loss is carried forward, rather than with the year of the breach. A breach-year loss may therefore be carried forward, subject to the business continuity test.
Statutory purpose and context
The draft says the purpose statement in section IB 1 supports this approach, as excluding breach-year losses would run counter to the purpose of subpart IB. The interpretation also fits section IA 3(4), which governs carrying forward a remaining tax loss balance, and section IA 3(6), which confirms that section IB 3 modifies that rule for companies. It is consistent with section IA 5(4), which identifies sections IB 3, IP 3 and IP 3B as alternatives available after a breach.
Status of the draft
The draft is preliminary and non-binding until finalised. It sets out the commissioner’s proposed position for public feedback before Inland Revenue settles its final view.
The consultation period will conclude on 27 November 2026.
