The New Zealand Inland Revenue has issued draft guidance interpreting the loss carry forward rules established in 2020, known as the business continuity test (BCT). This new draft aims to clarify anti-avoidance provisions not addressed in the previous interpretation statement, IS 22/06, released in 2022.
The new draft guidance provides additional context for how the BCT operates and emphasises the necessity for commercial rationale in any arrangements utilising tax losses. It outlines three anti-avoidance rules to prevent misuse: GB 3BA restricts pre-emptive arrangements prior to shareholding changes; GB 3BAB prevents the injection of income into loss companies for tax avoidance; and GB 3BAC prohibits the removal of deductions from loss companies with the main aim of tax avoidance.
These anti-avoidance rules ensure that only the designated loss company benefits from its tax losses. The draft guidance indicates a low threshold for when these provisions may apply, advising businesses to carefully evaluate their arrangements. For example, mergers and acquisitions may involve shifts in costs and revenues; however, if these changes lack clear commercial intent and focus mainly on tax benefits, the anti-avoidance rules will likely be enforced.
