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?

  • 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.

How audit insurance can help when Inland Revenue come calling

Terry Baucher talks to Rod Spicer about insurance cover for tax audits and assessments for filed returns – what they do cover and what they don’t.

Transcript

This week, I’m joined by Rod Spicer, the associate director of claims and underwriting at Accountancy Insurance, which is the leading tax audit solution in Australia and New Zealand. Rod is a chartered accountant with more than 30 years’ experience and has worked at Accountancy Insurance since 2013. He is responsible for the operations of the claims department, policy wording development and the management of large and complex claims.

Kia ora, Rod, welcome to the podcast. Thank you for joining us. Now tell us a bit more about Accountancy Insurance. How did it start and what’s its role for tax agents like myself and my colleagues?

Rod Spicer
So Accountancy Insurance was born in Australia, which is where I’m currently residing, by our founder a man called Pat Driscoll who saw a niche, or a spot in the market for a tax audit insurance. There’s obviously been some of the products there in the past, however, we developed the product initially for Australia and got that up and running and then took it over to New Zealand a number of years ago now, and in more recent years into Canada.

We’re currently operating in three different countries, all within the Commonwealth. The reason for that being that all Commonwealth countries, or certainly those three, have reasonable or reasonably compliant tax systems, as well as reasonable similarities in terms of income tax, GST and the like. So we’ve been able to adapt our policy to each of the three countries and onwards and upwards, hopefully.

So in New Zealand, we have an office with about 10 staff based in Auckland and it’s been there for a number of years now. We handle the claims side of things online out of Australia from an administration point of view.

But we’ve sort of been for the ride, if you like, with Inland Revenue over recent years, which has certainly been interesting. Going way back to the Penny and Hooper days. It was probably just about when we first started up that it hit the road, so to speak, and we went along for the ride. And I think there was a herd scheme and a couple of big things way back in the day.

But I think in recent years, Inland Revenue, as a result of their whole transformation programme – I think you might know a bit more about that than me – seemed to sort of go off the rails a little bit. And they probably pulled back from an audit perspective in some respects, but certainly in recent times we’ve seen activity there again, albeit that this year we all know that with Covid and what happened etc. I think Inland Revenue certainly took their foot off the pedal for a while, but we’re currently seeing them come back with a few new initiatives and we’re seeing a lot of GST verifications, GST refund reviews and audits, amongst other things at the moment.

TB
Oh right. Yes, the audit hours have dropped away since 2015 – from about 680,000 in the year to June 2015 to about 240,000 in the year to June 2020. So there has been a falloff in activity. But you’re saying right now we’ve got a spike going on in GST verification. That’s interesting to hear that’s picked up because I would have thought that would have been there all the time, regardless of what’s happening.

Rod Spicer
I probably should qualify that to say during the Covid months, that was all they were doing, they had to keep something ticking over, I think. Just to keep people on their toes, I think is a way to put it. But yes, and I probably should say that’s been consistent, certainly last financial year to 31 March 2020. And then given that Covid was sort of hitting exactly around the new financial year start time, that has been the one constant. And the majority of our claims, certainly in the four or five months after March, were GST reviews in the main.

But now that has been supplemented in recent times, in recent weeks by what you’re probably going to talk about as well – a campaign for want of a better word on the bright-line property rules, which is sort of playing itself out at the moment in various different realms. And we’ve also seen – and this happened last year back in November, because Inland Revenue and the New Zealand Government (same as Australia) signed up to all sorts of international data sharing arrangements. And they’re all being flooded with offshore bank account information.

And what we saw with Inland Revenue in November 2019, there was a first wave, and a lot of them weren’t even audits, they were just an opportunity to self-review and voluntary disclose if you hadn’t disclosed offshore bank accounts that you were supposed to. Some had a questionnaire, or some went straight into more detailed information, but it certainly just stopped then. So, there was a whole bunch of activity in November and then effectively nothing happened.

But in November 2020 we saw the exact same thing happening again. Slightly different letters. Some of them even delved into overseas life insurance policies that obviously, you know, the data dump Inland Revenue got – Rod Spicer has a life insurance policy in England or Switzerland or wherever – and we want to know about it as well as the bank account. So we’ve just now seen another spike in claims being lodged for these type of letters.

Look, some aren’t covered because they’re just a warning, an alert, information. You don’t have to do anything if you think your return is correct. But it certainly gives taxpayers an opportunity to voluntarily disclose if they think they’ve made an error or haven’t disclosed. But it doesn’t take too much to work out that Inland Revenue already know what the answer is. They’ve already got the information, so they’re just giving taxpayers a chance to voluntarily disclose. And if they don’t, I would expect audits or some sort of risk review or something to come as a result of that, because they’ve obviously already got the data sitting in the system from whoever gave it to them.

TB
Excellent. That’s really handy what you’ve done there because you just described the complete gamut of types of letters or enquiries we would see from Inland Revenue covering risk reviews, GST reviews to enquiry letters to full blown audits. Now delving in a little bit more about the detail of how a policy might work, basically, the policy covers most enquiries from Inland Revenue, doesn’t it? That’s the idea if you take out one of these policies, whether through a tax agent, it covers just about all enquiries from Inland Revenue?

Rod Spicer
Pretty much, our policy’s structured as a master policy.

It’s held nominally in the name of the accounting practice. So our client is effectively the accounting practice and the accounting practice then offers their clients an opportunity to participate in that group master policy held by the accountant. The client chooses to participate. They pay the premium and then they’re effectively endorsed as an insurable interest on the accountant’s policy for the policy period. So each accountant has a common expiry date. It’s not like a client pays today, and one pays next week, and the week after that. They’ll all still have the same expiry date, whatever that might be, month on month, every accountant has got a different date.

We deliberately have a very wide definition of what a tax audit is, but it has to be from a government revenue authority. And other than Inland Revenue, the only other real revenue raising authority in New Zealand that I’ve come across is the Customs Department, where they’re obviously claiming customs duty. And we’ve got a couple of claims on duty, on tobacco imports and stuff like that. But there are no province-based tax collecting authorities or states or whatever, it’s just Inland Revenue.

But the definition is very wide of what a tax audit is. And in its most pure and simple form, it’s any enquiry, review, examination, investigation or audit where there is a compulsion to respond. And it is about a lodged return with Inland Revenue linked to the tax collecting function of the New Zealand government. So that could be a phone call, an email, a letter. It could just start with an official enquiry via a telephone call and it could end up in a risk review that expands into an audit. It’s all the one matter from an Audit Shield perspective.

You can’t get a risk review and then take out Audit Shield in case it becomes an audit if IR don’t like what they find in the risk review. So every risk review letter says this is not an audit, but from an Audit Shield perspective, it is an audit. And that’s to the advantage of the accountants and their clients, because that definition is very wide and basically covers all enquiries from Inland Revenue where you are compulsorily required to respond.

So we don’t deal with warning, alert, fishing expedition type letters and the recent bright-line property mail out, which I know got a fair bit of press, and we’re probably going to see some more detailed information. Inland Revenue just sent out a mass list of clients saying we think you have bright-line property rule exposure. There’s nothing in your tax return. You haven’t lodged your return yet. The form’s overdue. No detail, no nothing there. Where they’re going wrong there – well, if you haven’t lodged the return yet and you’re going to lodge it and it’s going to include a bright line, that’s not a claim under Audit Shield because you haven’t even lodged the returns yet. Versus yeah, this is from a return from a year or two ago. We don’t believe bright-line applies and we’re going to tell IR why. That would be a claim on face value – once you work out what the property address was. They didn’t tell you in the first place this week, as we’ve seen.

So that’s broadly how we assess things from a client perspective. The amount that a client or the accountant can be covered under the policy depends on their turnover and business groups. We cover entities up to $100 million in turnover. We don’t cover listed entities or subsidiaries of global groups turning over more than $100 million as a global group. So it’s a small, medium enterprise type policy. It’s under $100 million turnover around, and we only cover New Zealand returns. So if your client is a New Zealand client who operates in Australia, and lodges Australian tax returns, Audit Shield in New Zealand doesn’t cover the Australian tax returns. But they could take out cover through their accountant in Australia.

TB
Fantastic. A great summary. So just as you alluded to there, it covers anyone who is a client of an accountant. So it can range from the individuals who’ve got tax returns, including rental income from overseas, all the way up to a large corporation as long as the turnover was under $100 million. So it’s very broad. How many clients, how many accountancy firms have you got in New Zealand now? Has business been expanding?

Initially we had zero and we currently have – because I checked before today’s session – 550 active participants, active accountants in New Zealand at the moment.

TB
That’s about 10% of all tax agents in New Zealand. I think there’s about 5,000 odd tax agents in New Zealand. So you’ve got plenty of scope for market expansion.

Rod Spicer
It’s like anything Terry, not every accountant is interested. I often chuckle when our business development manager says “I spoke to this accountant and they reckon they never get tax audits”. So I said, well, it’s not about what you’ve had in the past, it’s about what you’re going to have in the future. It’s irrelevant. And anyone who thinks in today’s electronic world of data matching, you might have got away with a lot of things in the past, or your clients did, or you weren’t on the IR radar.

But as we saw by the International Exchange of Information and the bright-line tests, they’re getting their data from other sources that everyone feeds into Inland Revenue. Banks, EFTPOS machines, point of sale, credit card, they’re all linked. I don’t know how many claims I’ve seen where the business under audit is perceived to be in the cash economy, if you like. Where do I get the data from? Well, all sorts of different sources, lifestyle, assets of the proprietors versus the amount of income that they’re declaring, banking records, all sorts of different things.

So IR’s tentacles extend a lot further than they used to in the past, so to say “I never get audited, my clients don’t need it”. Well, who knows what the future’s going to hold?  But I don’t expect the Inland Revenue and the New Zealand Government to be looking for less of a take from audit activity versus more in the next few years would be just my common man observation of most governments as a result of Covid-19.

TB
Do you think any particular group sees a lot of activity relative to others, or is that just across the board?

Rod Spicer
It’s a hard one for us because we try to keep the process as simple as possible with our accountants. We don’t want to bog them down in data so we don’t capture what industry each of their clients is in. Otherwise it would just be another layer of work that they’d have to do for what real benefit to them? Be great for us. I get that. You can look at ABC Builders Proprietary Limited or ABC Cafe Propriety Limited, it doesn’t take much to work it out. But we’ve seen the campaigns, if you like. So the property and construction campaigns, the IR letters will head that up.

They’re doing a compliance programme in property and construction, in fruit picking, in cafes and restaurants, cash economy type attention businesses.

So we see those campaigns, they come and go. But that’s sort of the flavour. Over the years, you can see the target areas where the Inland Revenue focus is on, and they are in your traditional industries where there’s a perception that maybe the cash economy is more rife than it is in other industries. It doesn’t take too much to work out those type of businesses.

TB
Just on the cash economy, is there a difference in what claims you might see in Australia and those from New Zealand? Because here I get the sense that because our GST is so comprehensive, the powers that be are a little, I wouldn’t say relaxed, but they don’t seem to be as concerned as I’ve seen the ATO reports are, about the extent of the cash economy.

Rod Spicer
I definitely I agree with you. I read all reports, in Australia and New Zealand, obviously, and I agree. The Australian Government Tax Office is far more belligerent on the cash economy in Australia, and Phoenix activity where, you know, companies disappear, and Mr Smith starts up the next day with the same looking company doing the same thing, and things like that. There’s definitely audit activity in that space. But I agree it’s not as much as Australia, but again, population relevant to the size, I suppose again would come into it. But, you know, the ATO have stringent active campaigns dedicated today to the black economy, they have a black economy taskforce in Australia. So there’s no Inland Revenue task force on the cash economy that I’m aware of.

TB
You know, the numbers in Australia are quite astonishing, even allowing for the scale of the Australian economy, basically five to six times bigger than New Zealand. The amount of money that’s said to be circulating through the black economy is AU$22 to AU$23 billion, is one number I’ve seen. That is way, way in excess of any estimate here. It’s thought the best estimates here are about a billion dollars per year, by the way. So that is quite a difference, even allowing for scale. And I do wonder if Inland Revenue here are perhaps underestimating what’s going on. But who knows?

Rod Spicer
If they ramp up their campaigns again, then we’re here to support the accountants. Obviously, you can’t take out Audit Shield after an audit or a review or enquiries have already happened. The client must be on cover under the accountant’s policy, at least one business day before any first form of notification comes to why the taxpayer client or the accountant in whatever form that may be. Now, obviously, at times there can be some allowance for postal delay. But if we see clients taking out Audit Shield very close to the date of notification, then we do have to ask some questions on occasion around the circumstances, just to make sure that there’s no prior knowledge or anything like that involved. But it’s pretty rare that it pops up. I won’t say if it never does, but it can.

TB
I’m sure. So how do you see things playing out from here? Do you think Inland Revenue has now got through its blip with Covid and Business Transformation, or is it still sort of shaking itself down?

Rod Spicer
I think come 2021 I expect to see increased audit activity. So maybe I turn the question around to you, Terry, because you’re probably more knowledgeable on New Zealand ongoing government and what their projected tax take and new tax rules are going to be. But if there’s going to be new tax rules introduced, they’re not going to come into play for some time. And then people are going to lodge a return and there’s going to be audit activity. But I would have thought how’s the New Zealand budget looking Terry? Good, bad, indifferent?

TB
Interestingly, the tax take, according to the financials for the June 20 year was only down about a billion dollars on expectation. And it’s difficult to make comparisons because of the change in accounting brought about by Business Transformation. So the tax take has held up pretty well, but they’ve spent a lot of money is the key thing on the other side. You know, billions went out –  $12 billion –  on the wage subsidy. By the way, the wage subsidy enquiries are not covered by the policy, are they?

Rod Spicer
I’m glad you mentioned that Terry. Audit Shield, at the risk of stating the obvious, is a tax audit insurance policy, it’s about revenue collecting by the New Zealand Government through Inland Revenue. So Covid brought about new things that no one had ever seen before, in Australia, Canada, New Zealand.  Tax audit insurance policies have traditionally never covered government benefit audits, grants, welfare payments and things like that. Then all of a sudden government started handing out money left, right and centre as subsidies to try and prop up business and the economy. So it wasn’t about the tax take. It was about money flowing out of the businesses. Our policy doesn’t cover government benefits, grants, subsidies. Initially Inland Revenue wasn’t even in charge of it. But it seems that they took over from whatever department was initially doing it. And then the other one of interest that’s popped up a few times is the government loan scheme that businesses can get.

Now that was first offered via banks and then that didn’t work, so it got moved to Inland Revenue. So I’ll admit we have seen audits of the wage subsidy and the loans and the loan scheme. But I’ve only seen them and had to tell the accountant, look, that’s not covered for the reasons that we said. So we put out a company announcement in April to say these things weren’t covered. But we’re now in November, so we don’t expect the accountants to remember a bulletin right at the start of Covid that Accountancy Insurance put out.

But we’re certainly still telling them about it when it pops up. No, that type of matter isn’t covered. However, sometimes where there’s smoke, there’s fire, Terry. And if those subsidy or wage scheme matters escalate, expand, move in scope into things like GST or income tax, for example, or PAYE matters or something, then on face value, it’ll be covered from that point in time onwards, not the wage subsidy or the lone scheme maters.

TB
You actually took the words right out of my mouth because I was going to ask if you had seen any instances where an enquiry about a wage subsidy claim or a loan under the small business cash flow scheme had led to, or appears to have led to a further claim in relation to another tax.

Rod Spicer
We’ve just been talking about whether we’ve seen any wage subsidies or the government loans scheme as a result of Covid result in further audit activity on income tax or GST or PAYE lodged return. I’d have to say so far, no, but I’d be surprised if we didn’t see something in the future in the New Year along those lines, would be my expectation at this point in time.

TB
I suspect you are probably right there. I also suspect that the sort of people that may get picked up on that probably were people who’ve never had an audit before and may rue that point. I think that’s a really good place to leave it Rod. Thank you so much for your time today. We here at Baucher Consulting have used Accountancy Insurance for a number of years now. I think it’s an excellent product which has saved our clients a lot of heartache. So, I can recommend you talk to the guys there. Thank you very much again. Rod, you have a great day.

Well, that’s it for this week. I’m Terry Baucher. You can find this podcast on our 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.

News on the latest COVID-19 initiatives

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.

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.

This week a look at the new Wage Subsidy Extension scheme

  • This week a look at the new Wage Subsidy Extension scheme
  • Capital gains tax is back on the agenda
  • Time to top up your KiwiSaver contributions

Transcript

From last Tuesday, businesses and the self-employed can now apply for the Government’s Wage Subsidy Extension.

Eligible businesses can get a lump sum payment for a further eight weeks of $585.40 per week per full time employee. The criteria for this has changed from the original wage subsidy scheme. Now a business to qualify must have had a revenue loss of at least 40% for a 30 day period in the 40 days before they apply, compared with the previous closest period last year. So, for example, you’d look at your revenue in this month, June 2020, and compare it with the revenue for June 2019.

Applications for this are open until 1st of September. And as in the case of the existing wage subsidy scheme, it will be administered by the Ministry of Social Development who will be working closely with Inland Revenue on this matter. As I understand it, what happens is the application comes in and MSD will check and then if they’ve got any enquiries, they’ll give Inland Revenue a call.

The tax treatment of this subsidy amount remains the same as previously advised. That is, it is not subject to GST, is non assessable and non-deductible for the employer, although when the payments are made to the employees, they’re taxed as regular income through PAYE.

This does lead to a rather cumbersome tax and accounting treatment and some of us are looking at this and thinking for ease of accounting and to avoid slip ups, it may be better for the employer to treat it as all taxable and deductible. The net effect is the same anyway.  We’re looking at the accounting treatment of this, which can get a little awkward because of this mismatch between the wage subsidy payment being non-deductible for the employer but remaining taxable for the employees.

Speaking of ongoing government support, last Friday after I recorded last week’s podcast, the Finance Minister announced that the Small Business Cashflow Scheme would now be extended until 24th of July. This has been an extremely successful initiative for small businesses. So far, $1.33 billion dollars has been lent to well over 70,000 businesses.

And as I discussed last week, it had taken the space that the Government’s Business Finance Guarantee Scheme had not filled. And the comparison between lending under both schemes is quite stark. As I mentioned, the Small Business Cashflow Scheme has been accessed by approximately 70,000 businesses and they’ve borrowed $1.33 billion dollars.

By comparison, lending under the Business Finance Guarantee Scheme has been $86 million to just 503 businesses, according to the latest business lending numbers from the Bankers Association.

Now, it’s not like the banks are not lending. In fact, according to the Bankers Association, business lending since March 26th has been quite extensive. They’ve lent over $10 billion dollars to over 16,000 customers, as well as the separately reducing the loan payments on another $12.5 billion for 13,000 customers. In addition, they’ve deferred all loan repayments on one billion dollars owed by 3,105 customers.

So, the banks have been working in the background. It’s just that the Business Finance Guarantee Scheme, which was quite a headline project at the time, isn’t designed to do the type of lending that businesses are looking for right now. That is short-term, immediately accessible and with an uncomplicated process.

Unfortunately, the Business Finance Guarantee Scheme ticks none of those boxes and that possibly is down to the design of it and the understandable wish of Treasury to protect the Government’s risk.

As I said last week, one of the things about the benefits of the Small Business Cashflow Scheme is it deals with a matter of resourcing for small businesses. The process to borrow under the scheme is very straightforward and money is delivered quickly.

And the process small businesses go through when applying for loans to the banks, they struggle with that. They have to get a lot of material together. It costs some money to get if they bring in their accountant to assist. And there’s no guarantee they’ll get the funds.

So as I said last week, I think once we’ve gone through everything, the Government should look very carefully at how a future scheme to help small businesses could be designed.  Maybe we want to have a look at what the Small Business Administration in America does. How it guarantees loans and works together with banks on lending.

A simpler process for small businesses could be very helpful for the future growth of our country. Because it’s accepted by all that, we’re going to have to grow our way out of this recession if we are to get the massive amount of debt that the Government has rightly borrowed for this emergency under control again.  [Updateit appears that preliminary discussions about a permanent iteration of the Small Business Cashflow Scheme have taken place.]

Still a live public policy debate

And as part of getting the Government’s debt to GDP ratio under control again, capital gains tax has popped up on the agenda again in a couple of instances this week. Firstly, James Shaw, the co-leader of the Green Party, talking to Jenée Tibshraeny raised it as something that we should be considering. Shaw’s view was that a capital gains tax made more sense now,

“It was our policy when we entered parliament in 1999; it remains our policy today. The extent to which we’ll lead with that or with something else [at the election] is yet to be revealed,”

And talking of rebuilding and still on the tax side, PricewaterhouseCoopers (PWC) issued a report called Rebuild New Zealand, which set out seven planks, as it called them, to rebuild New Zealand.

One of these is about addressing tax reforms.  And what it says about that, to pick up a theme of last year’s Tax Working Group, is that tax reform must be considered to broaden the Government’s revenue base and remove investment bias. It refers to the elephant in the room being a capital gains tax. It’s probably no coincidence that Geof Nightingale, who’s a partner at PWC, was also a member of the Tax Working Group.

The report goes on,

“In our view, there is now a greater need than ever to broaden New Zealand’s tax base so it relies less on taxing income. So is it time to look again at a simple, broad based CGT?”

The report cites the example of the introduction of a broad-based GST over 30 years ago as a model for designing a future CGT, and goes on to say,

“The debate on CGT would be very different if New Zealanders had a better understanding of the extent to which it could actually impact them during their lives and also the trade-off that there might be an eventual trade-off between CGT and income tax.”

And this is something I think should be considered: by broadening the tax base to include capital gains tax the need to increase the top rate of income tax, for example, is minimised. There is a trade-off here and I agree with PWC we should be having that discussion. I don’t think we had a great discussion last year.

We’ll probably see more discussion about this during this election. And it will be interesting to see how the parties all fence around the issue. As I said, in April in this Top Five piece, COVID-19 means we are going to need to have a look at the tax system. Whether tax rates rise or CGT comes in are all on the table for discussion.

Getting the max KiwiSaver

And finally, you have until 30th of June to make sure you have contributed a minimum of $1,042 86 to your KiwiSaver scheme in order to qualify for the maximum government top of $521.43 cents. Now, the government contribution isn’t a lot, but it’s free money, so you should take advantage of it if you can.

Incidentally, PWC’s Rebuild New Zealand report suggested the question of boosting savings should be considered in order to help address the funding of New Zealand Superannuation.  It noted “While there is much to be admired with Kiwisaver, it remains a lightweight compared to the compulsory savings regimes in other countries, notably Australia”.

The report doesn’t say so but we’re still paying for the decision in 1975 by Muldoon’s third National Government to scrap the compulsory superannuation savings scheme established by the third Labour Government.  In my view that decision by the Muldoon Government probably ranks as the single most economically harmful act by any New Zealand government in the past 50 years.

As I said, we’ve been paying for it for the last 50 years, particularly since the Baby Boomer generation reached retirement. And the matter will not go away. The Tax Working Group noted that structural deficits would be increasingly likely by the latter part of this decade. So the issue of addressing the cost of superannuation – how it’s funded – isn’t going to go away.

And on that bombshell, 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 time, Kia Kaha,  stay strong.

 

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

 

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.

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.