More on the COVID-19 measures, unintended consequences and what next?
- Explaining some of the detail about the Government’s COVID-19 package
- Inland Revenue discretion about waiving use of money interest
- Tax residency and unintended consequences of COVID-19
- Time to defer 7th May provisional tax and GST payments
Mike Tyson once said everybody’s got a plan until they get a punch in the mouth, and it’s fair to say that we’ve all taken one tremendous sledgehammer to the mouth in the past few weeks. The pace of the developments is extraordinary. As are the government’s attempts to keep up and get ahead of the issues.
Inevitably, that means that some of the detail perhaps isn’t as tidy as Inland Revenue, the Government and tax agents and taxpayers would like. But we can work through these issues. And that’s what’s happening. So, to clarify a position in relation to the government’s wage subsidy and payments subsidy no GST applies to these payments. A specific Order in Council has been passed to clarify that position and incorporate the payments in the exempt part of the GST Act.
As for the income tax treatment it is excluded income under Section CX47 of the Income Tax Act 2007 – but the payments which are passed through to the employees will be subject to PAYE. The portion of a salary that represents the wage subsidy, i.e. the maximum $585 per week for full time employee is not a deduction for the employer. So just to clarify that it’s not income on the way in when the employer receives it and it’s not a deduction on the way out.
Now, that will mean that people will need to make sure their accounting packages can deal with that properly. Otherwise, there’s a potential for a double deduction to incur when the salary gets deducted as well as the portion which represents a wage subsidy. And of course, the worst-case scenario the other way is that the wage subsidy might accidentally be counted as income.
Separately, I’m seeing some discussion about the treatment of a wage subsidy paid to a shareholder employee. Now, for those who don’t know, shareholder employees are shareholders in a company and they’re also an employee. They are usually within the provisional tax regime and not taxed under PAYE. And the advantage they have is that the salary that can be allocated to them for a tax year can be done after the end of the tax year before the return is filed. So, for example, right now, tax agents with clients linked to their tax agency will have until 31 March 2020 to file the tax returns for 31 March 2019.
And so accountants will be looking at this and saying, all right, we can allocate you this amount of the company’s income to you as a shareholder-employee salary for the year ended 31 March 2019, so people are working through that. And the question people are obviously looking at is what do we do for shareholder-employees for the 2020 year? I don’t know yet. It’s an interesting question. I suspect it’s possible that a shareholder-employee may not be eligible, in that case, for the subsidy. [CLARIFICATION, the latest thinking is they are eligible.]
These issues are a good example of how moving rapidly and without the normal processes of putting it through consultation does throw up these anomalous questions and other issues. It’s worth keeping in mind that the proposals for the wage subsidies were announced on March 17th, barely nine days ago. And so it’s not surprising we’re still working through some of the detail.
It might point to perhaps that small business involvement earlier on might have helped. But to be truthful, everything is moving so quickly at this stage, it’s inevitable that sometimes some detail slips through the cracks.
Meantime the tax measures announced at the same time as the wage subsidies – such as restoring building depreciation, increasing the value of the low value asset write off for assets to $1,000, allowing the waiving of use of money interest and allowing wider access to the in-work tax credit have now gone through and received the Royal Assent.
That’s actually a reflection of how quickly things can be done when required in a Westminster style democracy.
Now, one measure which is generally being welcomed but could actually be storing up a headache for Inland Revenue further down the track, is its decision to waive/suspend late payment penalties and use of money interest on late paid tax. At this point, it appears its being done on a case by case process, but on 25 March, just two days ago, Inland Revenue released a further update on what it was doing which read as follows.
If your business is unable to pay its taxes on time due to the impact of COVID-19, we understand, you don’t need to contact us right now.
Get in touch with us when you can, and we’ll write-off any penalties and interest.
It would help if you continue to file however, as the information is used to make correct payments to people, and to help the Government continue to respond to what is happening in the economy.
That’s helpful, but it also may be giving Inland Revenue a problem because it basically appears to be saying we’re going to write off all penalties and interest if you’ve paid late. That opens the door for, shall we say, some unscrupulous taxpayers who can decide to simply not pay and hold out until Inland Revenue comes around and bangs on the door. So Inland Revenue might have given itself a headache by doing that. But we do know it is on a case by case basis.
And there’s another issue that anyone who’s thinking about trying to pull a fast one needs to consider. The measure applies to provisional tax, GST and PAYE. In relation to GST and PAYE it’s worth remembering that Inland Revenue regards these as payments made on trust, that is, you’re withholding and paying tax on account of other people.
In that situation if Inland Revenue concludes you’re deliberately withholding payments, prosecution will probably follow, if it emerges you were in a position to pay it. So watch that space.
Cashflow is obviously tight for people and a lot of taxpayers will be in a position where the difference between the time they triggered the PAYE or GST liability and the actual due date of payment, everything has just run into a brick wall.
Waiving of use of money, interest and penalties is designed to help in that circumstance. But there will be other taxpayers who’ve got cash in the bank and could pay and should pay but decide they don’t want to pay and just play the game. I foresee that once Inland Revenue is back up to speed, we’ll hear more about those employers.
Moving on. There are going to be plenty of unintended tax consequences that will come out of this lockdown. And I’ve already encountered one interesting case. And it’s in relation to people who are holidaying here and can’t leave the country because the borders have been shut. So they’re stuck here because they can’t get back to where they come from, because the transit area countries have just shut down all connecting flights.
So what happens with their tax residency? In New Zealand, tax residency is determined in one of two ways. Either you have a permanent place of abode in New Zealand, which is the main test, or you spend more than 183 days in any 12-month period in New Zealand. And it’s that latter test that is going to trigger the accidental unintended consequences for taxpayers. There’ll be people who holiday here for, say, four, maybe five months of the year and then go back to somewhere in the northern hemisphere. I see quite a bit of that. They’ve already got some interesting tax issues they’ve got to be mindful of.
But what happens if they get stuck here? There’s the question of them becoming tax resident even though it wasn’t a deliberate decision to do so. Our legislation doesn’t give any discretion to Inland Revenue to consider the options that someone is stuck here either because they become sick (which has happened), or as in this case, a dramatic change of events means they can’t leave the country.
I know in the UK they have a days present test there as well. There is discretion on this matter within the legislation. And in fact, H.M. Revenue & Customs did release a press statement just reminding people that it would regard someone as an overstayer, for want of a better phrase, because of the Covid-19 outbreak, to be within those special circumstances.
We don’t have that option. Arguably, you might say, the relevant double tax agreement can sort it out and it will do so in most cases. But there’s a second issue that could happen for some people and that is it triggers the start of their four-year transitional resident’s exemption. And that’s actually quite significant for them. So, it may turn out that because of double tax agreement relief, they’re not deemed to be resident in New Zealand for tax purposes, but in their home jurisdiction. And therefore, New Zealand only gets to tax the income which arises only in New Zealand. That’s quite manageable.
But it’s the triggering of this four-year exemption for the transitional residence exemption and for transferring your foreign superannuation scheme that is more of an issue. I’ll be writing to Inland Revenue and asking for clarification as to how they will treat this and probably requesting a legislative amendment at some stage.
Moving on, what next? We’re in very uncertain times here. And we’re right up against the end of the tax year for those with a 31 March balance date, which is most people.
This event has happened at practically the worst time for them because they will have derived most of their income for the year. And then suddenly, wham, Covid-19 arrives, followed by lockdown and business comes to a shuddering halt, and what I’m hearing is cash flow has just dried up.
There are two tax payments coming up for those taxpayers with a 31 March balance date. On 7th of April, those who had a tax agent will have to pay their terminal tax for the year ended 31 March 2019. Now to go back to what I said a few minutes ago those who have the cash should pay it, but there’ll be those that may need to use Inland Revenue’s discretion. And most people would have been aware before the lockdown happened that they had that 7th April terminal tax liability coming up.
The bigger issue in my mind is what to do about the 7 May provisional tax payment, which is the final provisional tax payment for the March 2020 balance date.
There are two issues here. One, have you got the funds to pay it? And in the middle of a lockdown, which won’t end until April 26th or 27th April, how is it possible for accountants and clients to work out the GST liability for the period ended 31 March. So there’s real practical difficulties and in my view, Inland Revenue should postpone the 7th May provisional tax payment and GST collection dates by at least a month, possibly even two months, to let everyone catch up. Effectively, it’s doing that by that blanket measure I spoke about a few minutes ago when it apparently said “look we will waive interest and penalties on late paid tax”.
So why not take the pressure off taxpayers and itself? Because Inland Revenue will be affected here by the lockdown. It won’t have all its staff in the right places. And it’s also trying to to integrate the next part of its business transformation package. So I think that a deferral of the 7 May provisional tax and GST payment dates would actually be good for everybody involved, even though it would be a cashflow hit to the government.
Also, as to the question of 31 March year end, we’ve not heard anything from Inland Revenue on this, so we’re assuming carry on as normal. But these are extraordinary times. We’re trying to get hold of people, and ensure final elections are filed on time all with restricted communications. Although we have the ability to have people sign forms and get things done remotely, we still have a practical issue of being up against a deadline at a time when the whole country is in lockdown.
And I just wonder whether the government should think about saying, “Right, all elections that would have been due to be filed by 31 March, we will be extending the filing date as a one off measure to say 30 April or maybe a little bit later, say 31 May, depending on how the lockdown goes”.
There’s precedent for this around the world. In the US, the Internal Revenue Service’s due date for filing your 31st December 2019 Federal tax returns is 15 April and they come down hard if you haven’t filed by then. They’ve just extended that by three months to 15th July recognising the impact of Coronavirus. So if the IRS, the tax authority for the largest economy in the world, can take that measure I think Inland Revenue can probably cut us and itself some slack.
There are provisions within the Income Tax Act and Tax Administration Act to extend the time for late filing. So, I’d say to Inland Revenue “Save yourself a lot of bother and apply a blanket discretion and just simply extend the filing dates by one month, two months, whatever.” These are exceptional times. They require exceptional measures.
Perhaps Inland Revenue, which rightly or wrongly feels that if it does things like that, taxpayers will rip it off, should park its paranoia for a little while. Let’s just get things moving properly and then you can sweep up who actually was screwing around and who was actually genuinely caught up by this pandemic?
Well, that’s it for the week in tax. I’m Terry Baucher and you can find his podcast on my website. www.baucher.tax or wherever get your podcasts. Please send me your feedback and tell your friends and clients. Until next time, Kia Kaha. Stay strong.