24 Aug, 2020 | The Week in Tax
News on the latest COVID-19 initiatives including:
- Updated Inland Revenue determination on working from home costs;
- Resurgence wage subsidy eligibility
- Updated Business Finance Guarantee Scheme conditions
- Provisional tax due on 28th August
Transcript
In last week’s podcast I did a refresher on the payments to employees who were working from home and a reminder about Inland Revenue Determination EE002, which covered the payments from employers to employees. Now, I noted that that determination only covered the period up until 17th of September 2020, and I suggested that Inland Revenue probably needs to issue an extension to it.
Lo and behold, later that day, that’s what happened. Determination EE002A has now been issued. This is a variation to the previous determination and now applies to payments made by employers for the period 18th September 2020 through to 17th March 2021. So that’s great to see that come through from Inland Revenue.
The Determination includes a couple of interesting comments from Inland Revenue. Firstly,
The Commissioner is currently considering issuing a public statement dealing with the tax implications of having employees working from home as a “new way of working” rather than being limited to the enforced way of working occurs during the lockdown period of the COVID-19 pandemic.
Now, this public statement won’t be ready for publication before 17th September so Inland Revenue has decided to continue to allow employers and employees to use the approach set out in the previous determination.
Secondly, what Inland Revenue has also done is remove the requirement that the payment must relate to an expenditure or loss incurred by the employee as a result of the employee being required to work from home because of the COVID-19 pandemic. So I guess you could say it’s a relaxation of the rules, but it’s also about Inland Revenue recognising that work habits are changing. And the previous position with a flat out prohibition on employee deductions and the complications that this led to will need to be addressed. So there’s obviously something new in the pipeline, and I’ll bring it to you when that turns up.
Moving on, in other COVID-19 related news this week, we’ve got a two week Resurgence Wage Subsidy payment to be available nationally for employees and self-employed who are financially impacted because of the resurgence of COVID-19. To be eligible, your business must have experienced a minimum 40% decline in actual predicted revenue for a 14 day period between 12th August and 10th September compared to the previous similar period last year.
You can’t receive this Resurgent Wage Subsidy at the same time as other COVID-19 payments for the same employee. But once that those existing payments end you can apply for the Resurgent Wage Subsidy. Applications are open from 1p.m. today, 21st August through to 3rd September 2020. So that’s very helpful.
The return of the virus in Auckland has had ripple effects as everyone is now well aware.
Tourism from around New Zealand is driven to some extent by Aucklanders travelling around the country. And therefore, it’s not unreasonable that not only those businesses affected in Auckland by the move to Level 3 should be supported, but also those outside Auckland.
In a related move, the Business Finance Guarantee Scheme has been reshaped.
Now, this was the first attempt by the government to give financial support during the pandemic but the take up of this has been very low. At the moment, I understand $150 million have been lent although the banks apparently had put aside something close to $6 billion.
Now, what has been done is to make the scheme a little easier to access. Credit is now available for general purpose borrowing and capital purchases or projects that might be related to COVID-19. The revenue limits of whom can apply have been extended from $80 million per annum to $200 million per annum. The loan limit has gone up from $500,000 to $5 million and the loan term has also been increased from three to five years. So you have up to five years to repay the loan.
The scheme continues to have the government underwriting the default risk up to 80% of the loan. Now, no personal guarantee is required for loans under the scheme which is obviously helpful. All lending decisions, are made by the banks and are obviously subject to commercial rates of interest. In other words, loans under the scheme are pretty typical bank loans.
One of the drawbacks for small businesses that the Business Finance Guarantee Scheme had and probably still does to a large extent, is the amount of information that’s required to support the application for small businesses. That means pulling together a lot of information quickly and using accountants and other advisers to help them do so. That’s not always the most practical approach for smaller businesses. That’s why the Small Business Cashflow Scheme had a huge take up because it was more easily accessible with fewer lending conditions. Yes, the lending limits were much lower. But the point was that it was very readily and quickly available.
And for those who are eligible to apply for the Small Business Cashflow Scheme applications are still available open right up until 31st December 2020. So just a quick recap on eligibility for the Small Business Cashflow Scheme. You must have been eligible to apply for the original wage subsidy. That is you have to show at least a 30% percent drop in income or predicted income compared with the same period 12 months ago. The maximum size of the company organisation that can apply is 50 employees.
Under the scheme the maximum amount of the loan is $10,000, plus up to $1,800 per full time equivalent employee. And if you repay the loan within 12 months, it’s interest free, otherwise, a 3% interest rate applies. I’m hearing from other colleagues and tax agents that smaller and micro businesses made extensive use of the scheme, which is hardly surprising. It is a fairly flexible regime designed to reach smaller businesses.
And finally, just like the seasons, Provisional Tax has rolled around. The first instalment of Provisional Tax for the year ended 31 March 2021 is due next Friday, 28th August. A quick reminder that Provisional Tax is due if your residual income tax now exceeds $5,000. Otherwise, you can drop out of the regime.
But there’s a caveat to this. If it turns out that your residual income tax does exceed $5,000 in this year and you would have been liable to pay Provisional Tax under the previous $2,500 limit, then use of money interest at 7% will apply from 29th August.
The main thing here is to check how cash flows are going and probably err on the side of caution here. And a good thing to do in these very uncertain times if you’re paying substantial amounts of provisional tax – I think that’s anyone paying more than $60,000 – you should really be making use of tax pooling. It gives you a lot more flexibility. You’ve also got to consider any tax losses which may be available. And, of course, the impact on your business of these moves to various Alert Levels.
The key thing, as always with Provisional Tax is if you think you’re going to struggle with this, get in front of Inland Revenue straight away and set up an arrangement plan. At the moment, Inland Revenue is still being flexible and willing to cooperate in helping companies and businesses manage their cash flows and their tax payments. But sooner or later, their patience will wear thin. And at that point, you don’t want to be on the wrong side of the border with Inland Revenue, so to speak.
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. Please send me your feedback and tell your friends and clients. Until next week. Ka kite āno.
30 Mar, 2020 | The Week in Tax
- 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
Transcript
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.
23 Mar, 2020 | The Week in Tax
- Depreciation on buildings restored
- Low value asset write-off limit increased to $5,000
- Residual income tax threshold raised to $5,000
- Inland Revenue to have discretion to write off use of money interest
Transcript
The Government has released details of its COVID-19 support package and I’m here to discuss the four specific tax measures which form part of that response.
These measures are a mixture of giving immediate relief to taxpayers, who are going to be feeling the pain right now. They are also hoping to encourage investment activity going forward as the eventual recovery takes place.
There were a few surprises in this with the big surprise being the reintroduction of depreciation on commercial and industrial buildings. And this includes hotels and motels. So clearly this is of interest to a sector, the tourism sector, which is going to take a very significant hit as this COVID-19 pandemic continues.
The proposal is that depreciation will be reinstated for those buildings, and a diminishing value rate of 2% is proposed. (They’re working on the straight-line rate and hadn’t yet finished the actuarial calculations on this).
And quite apart from this welcome measure for industrial buildings it also means the capital cost of seismic strengthening will now be depreciable. This has been a sore point for many building owners for quite some time. And in my view, it is a matter that it should have been addressed some time ago.
But leaving that aside, it is an incredibly welcome move to see the depreciation restored in general for commercial industrial buildings and acknowledging that this would include the capital cost of seismic strengthening. It’s worth noting as well that this was one of the recommendations of the Tax Working Group. They suggested that they couldn’t really see any valid reason to continue the policy adopted in 2011 of stopping depreciation on industrial and commercial buildings.
Looking back on the papers from that 2011 Budget, the impression I gained was that that measure was one which was designed to actually balance the books and wasn’t really driven by anything around the fact that there was no economic depreciation going on. Quite clearly buildings depreciate and need replacing. That was true then and it’s true now so it’s simply great to see such a measure.
It’s an expensive measure, estimated to cost $2.1 billion over the forecast period to the 2023/24 fiscal year. I know from business owners and those with property investments in this sector that this will be very, very welcome. The legislation will obviously be rushed through shortly and it is intended to take effect from the start of the 2020/21 tax year, which for most people is April 1.
Also extremely welcome for taxpayers is the proposal to increase the low value asset 100% write off. This is something the small business sector has frequently requested.
This measure contained a surprise in that the level will be increased from $500 to $5,000 for the 2020/21 tax year before falling back to a new increased level of $1,000 with effect from the start of the 2021/22 income year and going forward.
The current $500 threshold has been in place since 2005 if memory serves right. So it was long overdue for an increase. The one-off increase to $5,000 follows a measure the Australians did a couple of years back. This is again extremely welcome. It will encourage investment, but it also greatly simplifies small businesses’ compliance costs.
The measure is estimated over a four-year period to cost $667 million. That’s not as much as I had thought, given that Inland Revenue and Treasury had been previously reluctant to increase the threshold. Again, a very welcome measure. The $5,000 is a bit of a surprise, but again, it’s a good opportunity for businesses once they come through what is going to be frankly, a pretty rough few months. No one’s sugarcoating that but looking ahead they may take the opportunity to upgrade their equipment and invest in new plant and machinery.
Small businesses and individual contractors and the like will welcome the decision to increase the provisional residual income tax threshold from $2,500 to $5,000. And that means with effect from the 2020/21 tax year that basically enables those taxpayers who meet that threshold will be able to defer paying their tax for the coming tax year to basically February 7, 2022.
So that immediately gives some cash flow relief for the micro businesses that are going to be really affected by what’s happening around us right now. The estimated cost of that is about $350 million. But it is a more a deferral because it means the tax is going to be paid later than previously anticipated.
The final specific tax related measure gives the Commissioner of Inland Revenue discretion to write off and waive interest on late tax payments for taxpayers who’ve had the ability to pay tax “adversely affected” by the COVID-19 outbreak.
Now the use of money interest rate is currently 8.35% and surprisingly, no announcement was made about reducing that rate. I think officials were of the view that that can wait till the regular review, which must happen now in the wake of the OCR cut we had on Monday. So, we probably will see very shortly the use of money interest rate on unpaid tax come down and that will be of help to taxpayers as well.
This is actually applicable from February 14 and it covers all tax payments, which includes provisional tax, PAYE and GST due on or after that date. Taxpayers who are struggling to meet those payments will be able to apply to Inland Revenue and say, ‘we are struggling here as a result of the COVID-19 outbreak’. The requirement is for a “significant” fall which is defined as approximately 30%.
This initiative is going to last for two years from the date of enactment of the announcement unless it’s extended by an Order in Council. So that’s good news. I’ve already had a few inquiries from clients about what do we do when we’re struggling to meet payments. And this is a very welcome relief.
Incidentally, although not specifically mentioned in the announcements, by implication, the late payment penalties and late filing penalties are already going to be suspended as part of this measure to help businesses. Again, a good measure. My longstanding view is that the late payments system does not work and should just simply be scrapped. Hopefully we’ll see something major on this later this year. For the immediate time, suspending use of money interest is a very welcome step.
Just briefly on the other announcements, obviously the leave and self-isolation support and the wage subsidy schemes for small businesses, are going to be very welcome. These schemes apply to independent contractors, so that’s going to be a great deal of relief and take off some of the pressure for them. And for all small businesses, we’ll be looking at the question of what do we do about self-isolation if key staff were taken out of work. This will help considerably.
Interesting point which has also happened and has gone a bit under the radar, is that for working for families, there is an in-work tax credit, which is a means tested cash payment of $72.50 per week. This was only available to families that who are normally working at least 20 hours a week if they were sole parents, or 30 hours a week if couples. The hours test has now been removed, so about 19,000 low income families are going to benefit from that change. And I know the advocates of Child Poverty Action Group, they’re very pleased at what’s in this package with the help for low income families and beneficiaries.
I’ll have more on this week’s tax events with my regular podcast on Friday. But in the meantime, that’s it for this special edition of the Week in Tax.
I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Please send me your feedback and tell your friends and clients. Until next Friday have a great week. Ka kite āno.
