Tax News

Latest Lockdown developments including third round of wage subsidy and second Resurgence Support Payment

Latest Lockdown developments including third round of wage subsidy and second Resurgence Support Payment

20 Sep, 2021 | The Week in Tax

  • Latest Lockdown developments including third round of wage subsidy and second Resurgence Support Payment
  • NZ Super Fund pays $2.3 billion in tax on record $15 billion return
  • Using tax to fund NZ Superannuation

Transcript

There’s inevitably been a certain Groundhog Day effect to the current Lockdown now we’re into our fifth week. It dominates the discourse and that hasn’t really changed in the tax world. The Government has now announced that there will be a third round of the Wage Subsidy and applications for that opened at 9:00 a.m. Friday and will remain open until 11. 59 p.m. on Thursday, 30th September.

As of September 12th, there have been 427,388 applications approved for the first two rounds of the wage subsidies, which has supported over 982,000 employees and 274,000 businesses. The total amount paid out to that date is just under $1.8 billion.

To quickly recap the tax implications of the subsidy for an employer, the receipt by an eligible business is excluded income to the extent that the subsidy is passed on to the employee. The employer is not entitled to an income tax deduction for wages paid out of the wage subsidy and the amount of wages paid in excess of the wage subsidy, that is amounts funded by the employer, are deductible as normal. No GST applies to the payment.

Now, Inland Revenue just reminded people that any amount of the subsidy that is not passed on to an employee is required to be repaid to the Ministry of Social Development (MSD)because that’s part of the criteria and declarations made at the time of application. If the wage subsidy isn’t returned to MSD, then Inland Revenue may consider the amount not returned as taxable income, which needs to be included in the income tax return for the year in which it was received.

Now, the interesting development this week is that the Government has now said that a second payment under the Resurgence Support Payments scheme will be available and, applications for that opened Friday. Now, in order to qualify, organisations must experience at least a 30% decline over seven days for the period commencing 8th September as a result of being at Level Two or higher.

Remember, the Wage Subsidy is only available at Levels Three and Four, but the Resurgence Support Payment (RSP)is available at Levels Two, Three and Four.

Now, the income tax treatment of this is that the RSP is not subject to income tax and accordingly, income expenditure funded by payments under the RSP scheme are not deductible. GST registered businesses will return GST on payments received under the RSP and will be able to claim input tax deductions for expenditure funded by payments under the RSP such as rent, for example. The intention is any RSP received is used to cover business expenses such as wages and fixed costs.

As of 12th September, about $500 million dollars has been paid. And the Government has indicated that there could be another two payments after the for which applications opened today. These will be three weeks apart, so long as the conditions that continue to trigger the Resurgence Support Payment scheme continue to apply, i.e. the country is in an Alert Level Two or higher.

Now, there’s an ongoing debate, quite rightly so, about the level of support, whether it’s targeted or appropriated enough, but it’s useful to see Inland Revenue is keeping people up to date as to what their obligations are. Whether the level of support is the right level or appropriately directed, well, that’s another matter.

And just quickly, a reminder that there are some other schemes available.  There is the Leave Support and the Short-Term Absence Payments Schemes. Businesses may still be eligible for the Small Business Cashflow (Loan) Scheme. And there’s also Business Debt Hibernation.  We talked about these when we first went into Lockdown. All those four schemes, by the way, are available at Alert Level One or higher.

A very large taxpayer

Moving on, the New Zealand Superannuation Fund, which was an initiative by the late Sir Michael Cullen, has just posted its strongest ever annual return of 29.63% for the June 2021 financial year. This means that the fund has now grown to $59.8 billion dollars, an increase of $15 billion over the 12 months.

And during that period, the Government made contributions totalling $2.1 billion to the fund. Now the super fund is a sovereign wealth fund, but almost uniquely, as far as I can tell, amongst sovereign wealth funds, it’s taxed.  For the year just ended, it paid $2.3 billion dollars on its $15 billion. And that’s because the rules around the Foreign Investment Fund and the Financial Arrangements regimes apply to the super fund.  It therefore will pay a fair amount of tax, obviously, when its investment return is nearly 30%.

Making it fairer, go further

Now, of course, the Super Fund was established to help fund the future cost of New Zealand Superannuation. You may recall last week we discussed the Treasury’s draft long term fiscal outlook and in relation to the growing cost of superannuation, Treasury put forward a couple of options to consider, which were increasing the age of superannuation entitlement from 65 to 67 or actually cutting back the amount of people’s entitlements.

New Zealand Superannuation is universal, which is one of its great strengths. Radio New Zealand has received Inland Revenue figures which show that in the March 2010 income year, there were 2,209 people who were on incomes of more than $200,000 a year who were receiving super.

By the year ended 31 March 2020 that number had more than tripled to 7,860. And as Baby Boomers and the population ages, more people who on the face of it don’t need Super will be receiving it because of its universality.

The Retirement Commissioner, Jane Wrightson, was asked about this and she said it’s not a problem, because one of the great things about New Zealand Superannuation is that it is universally applied. But she did say it is a reasonable policy question, the normal answer to this has been means testing which was applied briefly in the mid-90s and applies in Australia. However, this was roundly rejected by New Zealanders in the past.

So, two questions emerge. One, how are we going to fund superannuation going forward? And secondly, is it right that it is universal and people who on the face of it have sufficient to fund their retirement are still receiving it? Mind you, you could say 7,800 people in the context of the hundreds of thousands receiving New Zealand Superannuation isn’t actually that much, but that number will grow.

Now, a suggestion to address this particular issue of potential over generosity for higher income earners has been put forward by my colleague, Associate Professor Susan St John of the University of Auckland Retirement Policy and Research Centre. She has released a briefing paper updating an idea she’d first proposed back in 2019.  It basically treats the pension as a basic income and then taxes pensioners’ other income at a higher rate.

And the idea is that there will be a threshold at which it becomes uneconomic to take super, thus saving funds.

The proposals is, instead of having super inside the tax system, take it outside, treat it as a basic income, and then tax people receiving other income at a higher rate. And then that would mean, as I said, once their other earnings reached a certain point they would be better off to not claim superannuation.

The issue, as has been pointed out all around by various people, is that the number of pensioners between now and 2060, is expected to double. And Treasury’s forecast is that the cost of superannuation, which is already our most generous welfare payments, is going to grow at one and a half times faster than the economy over that period. Therefore, its cost, relative to the economy, is going to increase.

Susan St John’s proposal is that by taxing people who are earning higher incomes means that the payment is then focused on those who really need it. That is, those on lower incomes and that amount is likely to grow as well. And her modelling suggests the break-even point with a flat tax rate of 39% is when the other income exceeds $139,000 a year which is still pretty generous, I guess.

You can tinker with the tax rate, but it’s an interesting idea.  What it builds on is two things.

Firstly, New Zealand Superannuation is a type of universal basic income, which there’s always been a lot of discussion around. Secondly, it then uses the tax system to introduce a bit of equity and disincentivise excessive take up, but not too much, to be honest, because you can earn up to $130,000 in other income. This relative generosity shouldn’t really disincentivise work which is obviously one of the big problems about means testing, the disincentives it creates.

So it’s an interesting. Treasury I think seems quite interested in it, or appears to have had some discussions on the topic and we may hear more about it.

Well, that’s it for this week. Next week, we may be discussing the interest limitation rules in more detail. We’ve been waiting for those for some time. And given that they come into effect from 1st October, it’s going to be quite a crash course to get people up to speed by that time.

But anyway, that’s it for today. I’m Terry Baucher. And you can find this podcast on my website, www.baucher.tax  or wherever you get your podcasts. Thank you for listening and please give me your feedback and tell your friends and clients. In the meantime, kia pai te rā, have a great day!

The Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Bill clarifies the GST treatment of cryptoassets

The Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Bill clarifies the GST treatment of cryptoassets

13 Sep, 2021 | The Week in Tax

  • The Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Bill clarifies the GST treatment of cryptoassets
  • Latest lockdown developments
  • Treasury’s draft long-term fiscal position considers whether taxes need to increase

Transcript

The Taxation Annual Rates for 2021 to 2022 GST and Remedial Matters Bill was introduced to Parliament on Wednesday. Now this is the annual bill which is required to confirm the tax rates for the current year. And it also contains a number of GST and income tax remedial amendments. It doesn’t, by the way, include anything in relation to the proposed interest limitation rules. Those are going to be introduced separately, probably later this month, by way of a Supplementary Order Paper.

Now, what’s particularly interesting about this bill is that it clarifies the tax treatment of cryptoassets, and it has two proposed amendments which would exclude cryptoassets from GST and the financial arrangements rules.

As the commentary to the bill points out, cryptoassets probably fall within the existing scope of GST rules, although it’s a little unclear. And that means that the supply of a cryptoasset could be subject to 15% GST, or it could be an exempt financial service or a zero-rated supply to a non-resident. And what this means is that GST supply to a non-resident is zero rated, but then subject to GST when applied to residents. And that creates a distortion and a preference to sell to offshore investors. Now, that’s slightly different from the zero rating we do for exports, but it’s not seen as an export service here.

But more importantly – and this is an issue that’s well known – is that there’s a big risk of potential double taxation. That is when an asset is purchased with Bitcoin and then, for example, that Bitcoins converted back into fiat currency.

The commentary gives an example of Lucy purchasing $11,500 of Bitcoin from a domestic Bitcoin exchange. At present, the exchange is required to remit $1,500 dollars of this, being GST, to Inland Revenue on the taxable supply of Bitcoin they’ve made in exchange for New Zealand dollars. When Lucy uses the $11,500 of Bitcoin to purchase a car, GST applies on the sale of the car and therefore the company selling the vehicle must return another $1500 dollars of GST. So that means that GST of $3,000 has effectively been charged in relation to the purchase of a vehicle worth $10,000. If Lucy had used New Zealand dollars instead of Bitcoin, only $1500 of GST would have been paid.

This has been known for some time and what has happened is that the Government has decided they’re going to take cryptoassets out of the GST net. And the proposal is that the definitions of goods and services in the Goods and Services Tax Act will be amended to expressly exclude cryptoassets. Now, this amendment will apply from 1st January 2009, the date of the first cryptoasset, Bitcoin, was launched.  By the way, the definition will exclude non fungible tokens, which are going to remain subject to GST if supplied by a registered person.

So this is a very welcome development, clarifying the position that was causing some concern in the cryptoassets world, for the reasons and the example I gave a bit earlier – that there was a probable chance of GST being charged twice in essence, on the same asset. But just remember that GST is still intended to apply for non-fungible tokens as they’re regarded as a good or service that can be supplied.

Now, the other big amendment, which will be welcomed by investors in the cryptoassets world is that cryptoassets will be excluded from the financial arrangements rules. That will be done by amending Section EW5 of the Income Tax Act 2007 to define cryptoassets as an accepted financial arrangement.

Again, however, the issuing of non-fungible tokens are not financial arrangements and they do not meet the definition of a financial arrangements set up in the Section EW 3 of the Income Tax Act. This proposed amendment will also apply from 1st January 2009.

But there is one exception that people need to be aware of, that is cryptoassets will not be treated as an accepted financial arrangement if the owner receives amounts that are determined by reference to the purchase price of cryptoassets, and on the basis that is known by the owner in advance. The purpose of this exclusion is to say that cryptoassets that are economically equivalent to debt arrangements are still taxed under the financial arrangements rules.

And the commentary has an example of such a treatment. An investor invests in Bitcoin on a platform and Bitcoin is locked in for a set period and the investor is paid a guaranteed fixed return for the period that his Bitcoin remains locked into this particular platform. The commentary makes clear that the return on the growth will be taxable, so the additional 5% return will be subject to the financial arrangements rules. I think there might be some more questions dealing around that.

And the commentary also makes clear that the general rules still apply to cryptoassets. That if they’re acquired with the purpose of disposal, they’ll be taxable. Likewise, if you’re trading cryptoassets or you use cryptoassets for a profit-making scheme. But as I said, all the proposals will be welcomed by the investors in the cryptoassets world.

Now, the bill also has proposed amendments in relation to the bright-line test. Firstly, any income derived on the sale of a property which has been used as a main home will not be reduced where the person has used the main home exclusion twice in a two-year period or has engaged in a regular pattern of acquiring and disposal disposing of residential land.

The bill also has an amendment to ensure that a main home that takes longer than 12 months to construct will not be subject to the bright-line test. And this is in relation to residential land acquired on or after 27 March 2021. There’s also an amendment to clarify the application of the 12-month buffer and makes clear that a person may still qualify for the main home exclusion if they have multiple periods each of 12 months where the property is not used as a main home. So, again, that’s welcome because there was some confusion around how these rules might apply.

Business subsidies for wide public health impacts

Now, moving on, the Government’s Wage Subsidies bill has passed $1.2 billion dollars so far. And apparently this subsidy is supporting over 838,000 employees, 117,000 self-employed people and 242,000 businesses.

The highest number of supported workers are in the construction industry, followed then by food and hospitality.

Now, it’s also been made clear that although most of the country has stepped down to Level Two – the wage subsidy is not normally available below Level Three – a claim is still possible if part of the country is still in Levels Three and Four. Because Auckland has remained at Level Four, that means that businesses outside Auckland may still apply for the wage subsidy. However, they have to show the 40% drop in revenue required to meet the wage subsidy requirements is attributable to the effect of the continuation of Alert Levels Three and Four.

So that’s a wee caveat in there that people just need to be mindful of. I know that there’s lobbying going on in relation to the hospitality industry, where the impact of Level Two restrictions limit numbers in bars and restaurants to 50 or fewer. Those lobbying want the ability to still apply for a wage subsidy because they’re affected by that Level Two condition, not necessarily because of the ongoing Level Four lockdown in Auckland.

More taxes to pay for an ageing demographic?

And finally this week, government departments have been asked to prepare a series of long term insights briefings under the Public Service Act 2020. Now these are designed to make available to the general public information about medium- and long-term trends, risks, opportunities that may affect New Zealand.

Treasury has also got a requirement to produce a statement regularly on the long-term fiscal position – what’s known as Long Term Fiscal Statement, and what it’s decided to do is combine the two and it’s released a draft paper for consultation, which makes fascinating reading.

One of the things it says, is that looking at the impact of Covid, it thinks net debt will now peak at 48% of GDP in 2023. And in the Treasury’s view, there is currently no need to reduce debt levels. And it believes that deficits will shrink as the temporary support measures will end. And it also notes that debt level remains low relative to its peers such as the UK, Australia, America. The interest rate composition of debt is much more favourable than when net debt peaked at 55% of GDP in 1992.

And just as an aside, this is a global issue. The UK just this week has announced proposals which effectively increase taxes to pay for the impact of Covid and they’re quite significant increases. And I don’t think that the UK will be the last jurisdiction to be doing so.

But longer term, Treasury is noting that 26% of the population is expected to be 65 years old or more by 2060, compared with 16% in 2020. So that’s going to increase the cost of New Zealand superannuation and also expect healthcare costs to continue to grow because of an ageing population. And that ageing population will change demographics. For example, one of the things that’s happening is that the Pasifika/Māori people are generally significantly younger than other New Zealanders.

For example, by 2038, Māori are projected to account for 20% of the total population, but only 10%of the 65 plus population.

And this leads Treasury to conclude:

“Our projections indicate that the gap between expenditure and revenue will grow significantly as a result of demographic change and historical trends in the absence of any offsetting action by the Government.”

One of the offsetting actions it suggests, is to raise the age of retirement from 65. It suggests let’s have a look at what would be the impact of raising it to 67.

It also looks at what opportunities exist to raise revenue from either existing tax basis or new tax bases beyond personal income tax. And the paper sets out a number of options around raising revenue. And one is ten years of fiscal drag, which incidentally we’ve just done, which is where the tax thresholds and rates are not changed. And wage growth naturally raises the tax take as people’s income crosses income tax thresholds.

Some interesting stats here about the impact of raising GST. For example, in relation to personal income tax – if you raise income tax rates by one percentage point, so that the current top rate of 39% goes to 40%, the 33% rate to 34% and so on, that would raise 0.6% of GDP.

To get the same effect from GST you’d need GST to rise from 15% to 16.5%. And for company income tax, you’d need to raise it from 28% to 34%. So as the paper points out that would not be welcome.

The Treasury paper also points out the Government could extend the taxation of capital gains and maybe think about a land tax as well.  However, as the Tax Working Group pointed out there’s a few issues around a land tax. But the paper notes, by the way, that other countries are looking at the taxing of wealth, either by a net wealth tax or maybe taxes on inheritance.

And finally, the paper notes that New Zealand raises less from environmental taxes than other OECD countries. It’s equivalent to 1.3% of GDP, and that’s lower than the OECD average, which is roughly 2% of GDP. But it points out that environmental taxes are often behavioural taxes. In other words, they change behaviours but therefore may not be a sustainable additional source of revenue.

Anyway, there’s a lot of interesting data to consider in this paper. No doubt it will cause some controversy.

Well, that’s it for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening. And please send me your feedback and tell your friends and colleagues. Until next time Kia Kaha! Stay strong.

Latest lockdown developments

6 Sep, 2021 | The Week in Tax

  • Latest lockdown developments
  • More on allowances from Inland Revenue
  • Could a tax forgiveness programme help SMEs hit by Covid-19?

Transcript

As of today, businesses can now apply for the second round of wage subsidies if they meet the criteria for doing so.  Unlike last year, the wage subsidy is being paid in two weekly instalments, and one twist to this is that if you have not applied for the previous two-week period, you now miss out permanently.  The qualification is if you have suffered a 40% loss compared to a similar period in the six weeks immediately prior to the move to Alert Level Four on 17th August 2021.

As of August 31st, $922 million has been paid to businesses that had met the criteria, and 225,335 applications had been approved, covering over 822,000 jobs. Another 14,708 applications were declined with 73,000 still being processed as of the first of August.

The support continues to be there, and you can apply for wage subsidies in Levels Three and Four, even if you’re outside Auckland so long as you meet the eligibility criteria. There’s also the Resurgence Support Payment, which is available at levels Two, Three and Four. And there’s various other schemes such as the Leave Support Scheme, Short Term Absence Payments and the Small Business Cashflow Loan Scheme which are also available.

There will always be a few businesses that somehow don’t meet the criteria and other businesses that are slipping through. Whether these are enough to keep the business alive, is another matter, because as I’ve said previously, one of the issues Covid-19 has highlighted is how many small businesses are, in fact, relatively undercapitalised.

And just be aware that the applications are being scrutinised. There are now reports that four applicants who received a wage subsidy are now being investigated as to whether, in fact, those were valid applications.

Clarifying the home office rules

Moving on, I’ve spoken previously about allowances and Inland Revenue Determinations issued in relation to payments provided to employees to work from home. Inland Revenue has now issued a third determination, Determination EE003, which will start from 1st October and will run for 18 months through to 31st March 2023.

What this does is amalgamate and replace all the previous determinations that have been published on the topic which we covered recently. However, although this consolidates the previous determinations that have been made, there are actually no changes to the actual operating principles set out in those determinations and the amounts of payments that can be made by employers to employees as a reimbursement for home office use and use of personal telecommunication tools.

Those rates are $15 per week if they are treated as exempt income for an employee of working from home and then a further $5 a week if that employee is using their own telecommunications tool. So that’s a maximum of $20 dollars per week. As I’ve said previously, these allowances are not terribly generous, but they are at least a de minimis work around. Inland Revenue has by extending the application of the determination through till 31st March 2023, given itself time to have a further consideration of what it wants to do with the law around this practise.

At the same time, Inland Revenue’s latest Agents Answers for September sent to tax agents has caused some confusion. It had a note explaining that if a company uses a home office that is the home of one of its shareholders, it will not be able to claim a deduction for the office unless it has incurred the actual cost. This means that if a shareholder or director, runs the company’s business through a home office and pays all expenses relating to the home office, the company has not incurred any expense and cannot claim a deduction.

This came as a surprise loss to many fellow tax agents and left us scratching our heads a little bit on this. What Inland Revenue has done is set out the law, which is quite clear that the company can only claim the expense if it can prove a nexus between its business income and the home office expense and no private portion can be claimed. The company must incur the expenditure within the income year, that is, it has a liability to pay the expense either direct to the provider or to the homeowner.

And that last phrase there is where perhaps practise will probably align with the theory. What one often sees is that small businesses run out of family homes, will claim a home office expense. And in reality, what it should be is a reimbursing allowance of the type we’ve just been discussing. The director or shareholder-employee or other person should file an expense claim for the home office expenditure they’ve incurred.

Tax policy aimed at the big overwhelms the small

Now this highlights an issue that I’ve talked about previously is that our tax system doesn’t always work well for small businesses. There’s a mismatch that goes on. A lot of policy is driven by larger taxpayers who have the resources to manage their affairs properly and also make submissions when legislation is being considered. However small businesses just tend to muddle along as best they can and sometimes have matters, to put it bluntly, just dumped on them unexpectedly with an increase in compliance costs.

Managing compliance costs for SMEs is always a bit of a hard one for tax authorities. There’s a trade-off between minimising compliance costs and the potential for abuse. If I was to say where I think Inland Revenue lies on that line, I think they have always been more cautious about the opportunities for concessions to be abused.

So that’s that means that sometimes obstacles like this Agents Article note appear, which have everyone head scratching and don’t actually reflect the actual practise. Sometimes, I think policymakers at Inland Revenue would be a little surprised at how “imprecise” would probably be a polite way of putting it, some accounting records kept by small businesses are. This is, as I said earlier a reflection of how small businesses are undercapitalised or under resourced and sometimes the I’s aren’t dotted and T’s aren’t crossed.

Anyway, this note on home office expenses, as I said, caused some confusion. It probably could have been phrased better, it certainly caused a stir when it landed, even though ultimately when you drill down it isn’t a question of Inland Revenue changing the policy. Instead, it’s just saying there are procedures to be followed and you should do so. How helpful you might think that is in the midst of a general lockdown is another judgement you can make.

Tax forgiveness?

And finally, a very interesting article just popped up the other day from Ranjana Gupta, a senior lecturer in taxation with Auckland University of Technology.  Ranjana has suggested that a tax forgiveness policy could help many small businesses get through the financial woes that they’re dealing with a result of Covid-19.

She’s been carrying out some research and based on this suggests a voluntary disclosure programme for overseas income could protect these businesses affected by the pandemic and also promote honesty in tax matters. Essentially, what she’s pointed out is that the system, as it currently operates, tends to be quite punitive rather than encouraging compliance. Just to give an example, if you’re late with filing a return and paying tax, a late filing penalty will be imposed for the tax returns involved and there will also be late payment penalties and interest on top of that.

All the research I’ve seen shows that there is no better compliance here in New Zealand over prompt payment of tax than in other jurisdictions that may only impose an interest charge. And as a tax agent unwinding the position where late payment penalties have been imposed is very, very frustrating at times. As I said, it doesn’t seem to encourage any prompter payments.  Instead, what happens is the late payment penalties accelerate so rapidly that the debt balloons to the point where taxpayers just give up.

So, Ranjana’s point is a fair one. And she goes on to say that if a taxpayer is operating outside the tax system, the consequences of entering may be harsh because of this penalty regime. And so, this encourages even inadvertent tax offenders to remain outside the system.

And that is something I have encountered, that taxpayers who have realised they’ve made error are often quite worried about coming forward and how hard they will get hit for non-compliance. And so, the position that Ranjana is proposing, and I agree with it, if it’s made clear that there’s an amnesty going on, that may encourage people to come forward who may have stayed under cover hoping Inland Revenue wouldn’t find them.

And interestingly, she then goes on to discuss the point that currently 31% of the population are immigrants and one in 10 of those are self-employed without employees, with about 5% small businesses with employees. And her argument is that they may not be fluent in English and may be unaware of their tax obligations and are therefore unintentionally non-compliant. This was something we actually came across during my time on the Small Business Council. The migrant community is of a size that some may only deal in their own native language rather than, as you might think, in the wider community.

So anyway, as Rajana notes, they now face the ramifications of making a voluntary disclosure. And her suggestion is maybe Inland Revenue should think about some form of amnesty, or message to the public as to how it would take a more sympathetic approach to people who come forward. So, I think this is an interesting proposal.

I have found, to be fair, where people have come to me and made voluntary disclosures to Inland Revenue they’ve been treated reasonably well. There haven’t been many instances of any very heavy penalties being imposed. Tax is collected and the interest is paid and then the system carries on as normal. So, Ranjana’s proposal is something worth considering.

Well, that’s it for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening. And please send me your feedback and tell your friends and colleagues. Until next time Kia Kaha! Stay strong.

The latest lockdown developments

The latest lockdown developments

30 Aug, 2021 | The Week in Tax

  • The latest lockdown developments
  • What to do if you can’t pay provisional tax or GST
  • The perils of making payments to overseas beneficiaries
  • Reflections on the late Sir Michael Cullen

Transcript

We’re now into our second week of lockdown and the full range of government support packages such as the Wage Subsidy and Resurgence Support schemes are now open for applications.  As of Wednesday night, 128,000 wage subsidy applications had been made and almost $500 million paid out. Other tax agents are reporting turnarounds as quick as four hours between an application being filed and payment being received.

Lockdown has had a knock-on effect for Inland Revenue staffing because it is responsible for managing the Resurgence Support payments, and since they opened on Tuesday morning Inland Revenue says it’s already received more than 95,000 requests and has already approved 70,000, with distributions totalling $130 million already made to over 40,000 applicants. In addition, Inland Revenue is also working alongside the Ministry of Social Development in checking and signing off on Wage Subsidy applications.

Consequently, Inland Revenue’s call centres are pretty overloaded at the moment because staff have been directed to help in those areas. The dedicated tax agent hotline has been closed down and we’ve been encouraged to use the messaging through the myIR function, and a colleague has reported that he’s had excellent service using that.

Just as an aside, I deal with other tax agencies around the world. And although it’s easy to take a lot of pot shots at Inland Revenue, to borrow a phrase, “We don’t know how lucky we are”. I recently finally received a reply from the United States Internal Revenue Service to a letter that I had sent 19 months previously. HM Revenue and Customs in the UK is an exercise in great patience in trying to deal with them online. In fact, their systems make it impossible to set up an online account from New Zealand. So you may be experiencing frustrations in getting through to Inland Revenue, but rest assured, you could be a lot worse off.

To quickly recap, there are a range of support packages now available at Levels Three and Four including the Wage Subsidy Scheme, the Resurgence Support Payment, which is also available at Level Two, the Leave Support Scheme, Short-Term Absence Payments, the Small Business Cashflow Loan Scheme and Business Debt Hibernation. All those are available now as we discussed in last week’s podcast.

Now, it so happens that the first instalment of Provisional tax for the year ended 31 March 2022 for those on a March balance state is due on Monday, and GST for the period ended 31 July is also due on the same date.

Inland Revenue have advised they are of course, open to assisting with payment plans if you are unable to make payments in full for either Provisional tax or GST.    We’ve said this many times before the key is to get in contact with Inland Revenue as quickly as possible. Now as I said, you may be experiencing some difficulties getting through on the phones, but the myIR function works extremely well and actually Inland Revenue are encouraging its use. The key point is to get in touch with them straight away. Let them know that you are experiencing cashflow issues and you want to set up an instalment arrangement.

Now in those circumstances you also need to set out whether or not your business has been adversely affected by Covid-19.  Get in front of Inland Revenue as quickly as possible is always the best approach now for businesses that have been hit by Covid-19 (That would be the hospitality sector and large parts of the retail sector as well).

Inland Revenue will be prepared to remit use of money interest on late payments. It’s got specific provisions in the Tax Administration Act to enable that. According to information it sent to tax agents overnight, Inland Revenue has remitted more than $17 million of use of money interest for over 96,000 taxpayers and suppressed another $71 million for another 21,000 taxpayers who have set up a current payment arrangement.  So Inland Revenue is prepared to be accommodating for businesses in difficulties. But as always, it’s a question of communication.

Quite apart from trying to allow special arrangements will be made for those affected by the lockdowns, Inland Revenue message is still to continue to file tax returns on time and make tax payments on the due date. But as I repeated earlier, if you are experiencing issues on this, get in touch with it.

Now, there’s been plenty of debate about when and how we will open up to the world after our vaccination programme has been completed. And it’s worth noting that there are about one million Kiwis living overseas at the moment. It is the second largest diaspora in the OECD after Ireland as a percentage of population.

And one of the things I regularly advise on is the implications of making payments to and from members of this diaspora. This week alone, I had three such enquiries and they often involve trust distributions. The plan is that the trustees here want to help a family member overseas, for example a student at university, and they naturally look to see, well what can we do by way of distribution from a trust to help.

The key tax issue here to watch out for though, is that the overseas tax treatment of distributions from trusts is often radically different from what happens here. And although that sounds an obvious thing to say, you would be surprised at the number of times that I’ve been asked to assist or deal with issues involving distributions that have been made without properly considering the tax consequences for the recipient in their particular jurisdiction.

The UK tax treatment is particularly complex because the UK has a habit of adding patches upon patches to legislation to deal with issues rather than do a fundamental rethink. And there is a very real risk that a distribution of what is apparently a tax-free capital gain here will actually represent a fully taxable capital gain for UK tax purposes.

So, if there are any trustees considering distributions to overseas beneficiaries, you must seek advice before doing so. If not, you either run the risk of the distribution being taxed as income, which can be up to 45% in the UK or as a capital gain, which is 28%. So get advice before making any payments.

And finally, this week, a few reflections on the former Finance Minister and chair of the last Tax Working Group, Sir Michael Cullen, who died last Friday.

Alongside Sir Roger Douglas. Sir Michael ranks as one of the most influential finance ministers of the past 40 years. His legacy includes KiwiSaver, the New Zealand Superannuation Fund and Working for Families. There was also the establishment of Kiwibank during his time as finance minister. Equally importantly, he ran a very stable set of books during his time, and he attracted a lot of criticism for it. But the result was the Government’s books were so solid that it has enabled us to manage the triple crises of the Global Financial Crisis, the Canterbury earthquakes and now Covid-19 in much better shape than most other jurisdictions in the world. And that is probably one reason why politicians of all sides have praised him on his passing.

I did get to engage with Sir Michael professionally in 2018 when I prepared and presented a paper on the possibility of a tax advocate to the Tax Working Group. He chaired the discussion briskly and with humour. Something that has come out from discussions with several former Treasury and Inland Revenue officials, they’ve all spoken warmly of their time working with him and his dry wit was a factor

When he presented the final Tax Working Group report in February 2019, much of the noise and discussion was around its recommendation for a capital gains tax. But he spent quite some time during his presentation talking about the need for environmental taxation to help address climate change. And in doing so, he clearly remembered the bitter experience of the abrupt changes made during the Fourth Labour Government because he repeatedly stressed the need if changes to environmental taxation were to be made, then the impact on those most affected by those changes would need to be managed very carefully. He was clearly talking about farmers and to a lesser extent the transport sector.

Right to the very end he was always engaged in public policy, and he continued to have a big interest in tax policy. His reflections on what needs to happen around environmental taxation were wise words and should be heeded by the Government and future governments of whatever hue. He will be sorely missed.

That’s it for today, I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts.  Thank you for listening and please send me your feedback and tell your friends and clients. Until next week ka kite āno!

What Government support is available for businesses and self-employed affected by the lockdown?

What Government support is available for businesses and self-employed affected by the lockdown?

24 Aug, 2021 | The Week in Tax

  • What Government support is available for businesses and self-employed affected by the lockdown?
  • What is the tax treatment of allowances for employees required to work from home?

Transcript.

With the return to Level Four lockdown, the Government has reactivated its various support mechanisms for businesses and the self-employed. First up is the latest iteration of the Wage Subsidy Scheme. Employers and self-employed can apply for this. Initially, applications are going to be open for two weeks. And as in previous times, this will be run by the Ministry of Social Development, and you apply through their website.

One thing is that the payments are going to be increased. They’re going to be $600 per week per full time employee and $359 per week per part time employee. The criteria will be detailed in full as part of the declaration that’s to be filed when you make your application.

Businesses, organisations and self-employed will be eligible if they experience a 40%[i] drop in revenue over a seven-day period, compared with a typical seven-day period in the six weeks before the increase in alert level. Seasonal businesses need to show a 40% revenue drop compared with a similar week in the previous year.

You need to have been in business for at least six months. Charities, not for profit organisations, the self-employed, as I mentioned, and pre-revenue businesses such as startups may be eligible to apply. Applications for the wage subsidy are available at levels three and four

Starting Tuesday next week applications can be made for a resurgence Support Payment.

The criteria is that they’ve got to show a 30% drop in revenue over a seven-day period after an alert level increase and meet other criteria, including the business must have been in business for at least six months and it must be considered viable and ongoing.  When determining income for this payment income such as interest and dividends and all form of residential commercial rent is excluded.

Now, the Resurgence Support Payment is not a loan, it is a subsidy, so it does not have to be repaid. Eligible businesses and organisations can receive the lesser of $1,500 plus $400 per full time equivalent employees, up to a maximum of 50 full time equivalent employees, or four times the actual revenue decline experienced by the business.

Now, the Resurgence Support Payment is actually available at Levels Two and above. So you’ve got a little bit more flexibility around being able to apply for it, depending on what may happen with alert levels around the country.

Then there is the Leave Support Scheme, which enables businesses to pay their workers if they, and this is probably quite relevant right now, particularly in Auckland, have been told by a health official to self-isolate and they cannot work from home, then the business can apply for the Leave Support Scheme. Currently, payments are $585.50 per week per full time workers and $350 per week for part time workers. But from next Tuesday, 24th August, the payment will increase to $600 per week for full time workers and $359 per week for part time workers.

There is also a Short Time Absence Payment. It’s a one-off payment which is eligible for the self-employed. And again, workers need to be unable to work from home and need to miss work because they are being told to isolate and are waiting for Covid-19 tests. Employees or self-employed can apply once in any 30-day period. And the Short Time Absent Absence Payment is available at Levels One and above.

Now, also available, and something which was highly successful last year is the Small Business Cashflow (Loan) Scheme. If you’ve previously applied for this and fully repaid it, you can apply again.

You must show the 30% drop in revenue due to Covid-19 measured over a 14-day period in the past six months, compared with the same 14-day period a year ago. And by the way, if your revenue from the same period a year ago was also affected by Covid-19, you then look at the same 14-day period two years ago, that is in 2019,

The amount which each business can borrow is up to a maximum of $100,000. But basically, it’s $10,000 per business, plus $1,800 per full time equivalent employee. It’s interest free if it’s paid back within two years. Otherwise, an interest rate of 3% will apply for a maximum term of five years and repayments are not required for the first two years. Eligible businesses who may not have applied previously for this can do so now.

Now, there’s also Business Debt Hibernation, which is a government initiative enabling businesses affected by Covid-19 to manage their debt. It’s basically a debt arrangement scheme arranged through the Government and applications will be open until 31st October 2021.

As you can see, there’s a fair bit of support available.  The Resurgence Support Payment will be managed by Inland Revenue, but the Wage Subsidy Scheme is being managed by Work and Income.

We’ve heard they will be monitoring and checking the applications for the Wage Subsidy and the Resurgence Support Payments more assiduously than may have been the case last time around. So you have been warned. But the key point is, the Government has turned on the taps and support will be available there. So those that are affected and eligible should take the opportunity to apply for support.

Moving on what about allowances for employees required to work from home? Well, this was a matter of some great discussion last year and in response Inland Revenue issued Determinations EE001 and EE002.

The first Determination, EE001, is in relation to reimbursing payments for employees using phones and other telecommunication tools when working from home.  This Determination provides at the moment under a de minimis option, $5 per week can be paid as a reimbursing allowance. The payment will be treated as exempt income for the employee and deductible for the employer.

Under Determination, EE002 employers may make payments of up to $15 per week to an employee who is working from home as a result of the lockdowns. Again, that will be treated as exempt income of the employee and is also deductible for the employer. If it’s paid fortnightly, it’ll be $30 per fortnight or $65 if paid monthly. This payment is in recognition of general expenditure such as additional heating costs that an employee required to work from home may incur.

In addition, there’s the ability to make a payment for the cost of furniture and other equipment for use at home. And an employer may either use the safe harbour option where up to $400 may be paid to an employee for furniture and equipment costs and treated as exempt income.

Alternatively, an employer may choose a reimbursement option in which case the amount which may be reimbursed is equal to or less than the deduction that the employee could have had for depreciation on the asset, but for the fact that under the Income Tax Act employees get no deduction for expenditure incurred as an employee.

Now, these allowances were put in place very quickly last year during the first major lockdown. They were due to last until 30th September 2020. Then another Determination extended their operation through to 17th March 2021. Subsequently a further variation to was issued to extend the application of these Determinations from the period 18th March right through to 30th September 2021.

Inland Revenue, as part of that variation said it was working on a comprehensive review of the treatment of tax payments made to employees working from home and the Determinations EE001 and EE002 were temporary responses to the Covid-19 pandemic. We’re still waiting for that more detailed analysis and perhaps more generous thresholds.

I suspect we might see a further temporary extension given what’s happening now and also the fact Inland Revenue is very busy on other matters going on in relation to the Government’s interest limitation rules and related bright-line tests legislation.

But anyway, those are the allowances are in place so there’s some relief even if it may not be generous. Employers can pay more if they wish but anything in excess of the de minimis allowances set out by Inland Revenue should be taxed through Pay As You Earn. A genuine reimbursement of expenses will be fine.

Well, that’s it for this week. I’m Terry Baucher and you can find this podcast on my website, website www.baucher.tax or wherever you find your podcasts. Thank you for listening. Please send me your feedback and tell your friends and clients. Until next week stay safe, mask up and scan if you are out and about and good luck everyone. Ka kite āno.