Rate for extinguishing tax losses when tax is written off

(Clause 132)

Summary of proposed amendment

The Tax Administration Act 1994 is being amended to reduce the rate used to extinguish the tax losses of companies when their tax is written off.

Application date

The amendment will apply from the date of enactment.

Key feature

The rate used for extinguishing losses of companies who have tax written off is being reduced to 28%. The rate for other taxpayers will remain at 33%.

Background

The Tax Administration Act 1994 allows Inland Revenue to write off tax which cannot be recovered in certain cases.

If Inland Revenue writes off tax for a taxpayer who has a tax loss, it must extinguish all or part of the taxpayer’s tax loss in proportion to the amount written off by dividing the amount written off by 33% and reducing the tax loss by that amount. Currently, the legislation provides a single rate of 33% for extinguishing tax losses.

When the provision was introduced, the company tax rate was 33% and the top marginal tax rate for individuals was 39%. Submissions on the provision, when it was introduced in 2002, noted that the rate used for extinguishing tax losses should be the taxpayer’s marginal tax rate. Officials’ response was that a single rate was preferred for simplicity reasons, and the 33% rate would generally either be accurate or taxpayer- friendly.

Since the provision was introduced in 2002, tax rates have reduced. The top marginal rate for individuals is now 33% and the company tax rate has been lowered from 33% to 28%.

Given these changes to rates, the 33% rate for extinguishing losses is too generous in all cases for companies because they are taxed at a flat rate of 28%; in other words, insufficient company losses are extinguished under the current 33% rate. The rate for other taxpayers should remain at 33% to ensure individuals on the top marginal tax rate do not have their losses over-reduced.