IRD to home in on loss refunds

Over the past few years, many businesses have found themselves in the situation where their businesses cost more to run than they bring in.

This often results in an end-of-year tax refund from the IRD.

But if your business is making consistent losses it may come to the department's attention. The IRD puts out a document every year detailing the top things on its hit list for the year. This year, loss-making businesses are one of them.

The IRD has acknowledged that people have made mistakes in their tax returns in the way they deal with tax losses. The IRD's public education campaigns and a push for voluntary disclosure ('fessing up) found that losses of $15.6 million had been "adjusted", in IRD terms, at the end of April.

It's not all because people have been structuring things so it looks like they are making a loss. Some of it is just basic mistakes in returns, whether it's by the people filing them or those providing the information.

The IRD has, on its website, a checklist of common errors. Some concern rules pertaining to shareholder continuity. Ownership changes of more than 49 per cent can mean losses disappear. Loss offsets between companies need to have common ownership of 66 per cent and trusts cannot pass losses to beneficiaries or individuals.

When it comes to businesses that are generating losses consistently, the IRD will consider them on a case-by-case basis.

If there is no chance of ever making a profit and there is little time or money invested then there is a chance that deductions may not be allowed.

The master tax guide says: "The word business for the purposes of the Income Tax Act 2007 includes any profession, trade, or undertaking carried on for profit.

"Consequently, the fundamental notion of the concept of a business is the exercise of an activity in an organised and coherent way to attain the end result of a profit.

"The question of whether a taxpayer is in business involves two aspects. These are the nature of the activities, which must amount to a profession, trade, or undertaking, and the intention with which the taxpayer engages in those activities (the venture must be carried on for profit).

"An intention to make a profit is sufficient, even though, when looked at realistically, there seems to be no real prospect that that goal can be attained."

Does your loss-generating business meet that definition?