COVID-19 Tax Relief
The COVID-19 Response (Taxation and Social Assistance Urgent Measures) Bill was passed on 27th March 2020 and enacted a variety of measures to provide tax relief to those affected by the pandemic. Below are a selection of these changes that are relevant to our clients.
Increase in the provisional tax threshold
The Bill increases the provisional tax threshold from residual income tax of $2,500 to $5,000 beginning from the 2020/2021 tax year (1 April 2020).
This means that any tax returns filed for the 2020 year (ended 31 March 2020) will only generate a provisional tax assessment if the RIT is over $5,000. This is intended to be a permanent change and will reduce the number of tax payers required to pay provisional tax by approximately 95,000 allowing them to retain cash to use within their business during the year.
Low value assets threshold increase
The threshold for low value assets is temporarily increasing from $500 to $5,000 effective from 17 March 2020 - 16 March 2021. The threshold will permanently increase to $1,000 from 17 March 2021.
This means that businesses can now claim the full cost of more low value assets in the year they purchased them, rather than having to spread the cost over the life of the asset through depreciation. Previously, tax payers could claim the immediate deduction for only small assets that cost less than $500.
Use of money interest relief
The IRD can remit interest on late payments if the customers ability to make payment was adversely affected by COVID-19. This is effective for payments due on or after February 14, 2020.
This means that businesses that have made late tax payments as a result of being affected by COVID-19 can apply to IRD to have any use-of-money interest (UOMI) on late payments remitted. The IRD must be satisfied that the taxpayers ability to make a tax payment on time has been significantly adversely affected by the COVID-19 outbreak. Contact the IRD through myIR to apply for this.
In work tax credit eligibility criteria
The in work tax credit changes removes the work hours requirement from the IWTC eligibility criteria, effective from 1 July 2020.
The IWTC is an income tested cash payment of $72.50 per week to working families with children. To be eligible, families must be normally working at least 20 hours a week (sole parent) or 30 hours a week (couples).
This change means that working families who have a reduction in working hours as a result of COVID-19 do not lose their eligibility for the IWTC. This is a permanent change and takes effect 1 July 2020.
Wage subsidies
Wage subsidies are paid by the Ministry of Social Development (MSD) to employers including sole traders and the self-employed upon application. An eligible employer should apply for the subsidy and pass this on to their employees. The subsidy is designed to assist employers to retain staff and help them to pay wages during this time.
The subsidy is exempt income for the employer. The employer is not entitled to an income tax deduction for wages paid out using the subsidy e.g. this cannot be claimed as an expense. Any amount paid on top of the subsidy to top the employee up to their usual wage can be claimed as normal. Whether the employer tops up the subsidy with cash payments or annual leave is up to them to arrange with staff. Employees cannot be forced to use their annual leave entitlement.
The employer is not liable to pay GST on the subsidy received.
The wage subsidy should be processed as part of the employees normal wages - all deductions of PAYE, Kiwisaver, Student Loans etc are made as normal.
If your employee’s usual wages are less than the subsidy, you must pay them their usual wages. Any difference should be used for the wages of other affected staff who may earn more on average.
Employers should keep accurate records detailing the amount of the subsidy received and details of the employees it was paid to, to assist with MSD reviewing records later.
Many self employed people will receive the subsidy in the 2020 tax year (ended 31 March 2020), but in most cases only 1 or 2 weeks of it relates to the 2020 tax year. The IRD position is that these payments can be returned in the income year in which the income would have been derived. For example, this means that the amount received prior to 31 March 2020 can be spread if it relates to income that would have been derived after 31 March (the new 2021 tax year).
To be eligible for the wage subsidy businesses must declare that they:
have had a 30% revenue drop due to COVID-19 (see more details below)
will retain named employees for at least the duration of the subsidy (12 weeks)
will pay named employees, at a minimum:
for any work they do at their normal rates
at least 80% of usual income where reasonably possible (for employees working reduced hours while self-isolating)
the full subsidy received for each named employee, except where a person’s income is normally less than the subsidy amount, in which case they can be paid their normal salary.
30% decline in revenue:
Your business must have experienced a minimum 30% decline in actual or predicted revenue over the period of a month, or 30 days, when compared with the same month, or 30 days, last year, and that decline is related to COVID-19.
This means your business has experienced a 30% decline in:
actual revenue, or
predicted revenue (e.g. for businesses who have seen a reduction in bookings such as accommodation providers), and
that decline is related to COVID-19.
Your business must experience this decline between January 2020 and 9 June 2020.
Subsidy rates:
Payment rates under the modified Wage Subsidy Scheme are unchanged from the original COVID-19 leave and wage subsidy schemes. They are:
$585.80 (gross) per week for full-time employees, where full-time is 20 hours or more per week
$350.00 (gross) per week for part-time employees, where part-time is less than 20 hours per week.
Employers must pass the full amount received onto the employee, except where a person’s income is normally less than the subsidy amount (ie. $250 a week), in which case they can be paid their normal salary. Any difference should be used for the wages of other affected staff - the wage subsidy is designed to keep your employees connected to their employers.
Employers can apply the wage subsidy for their casual employees who would have been expected to work during the time they receive the wage subsidy. To determine casual employees’ subsidy rate, employers should use the average hours per week for the last year. If employees have worked for less than a year, employers should average the hours worked during the total employment period.
You must retain the employees named in your application for the period of the subsidy.
Employers are required to agree that, for the duration of the subsidy, they will make best efforts to retain the employees the subsidy was paid for.
Examples:
Case study: Non-essential business + minimum waged worker
James is a barista at a Wellington café. James earns the minimum wage. The café is closed for the lockdown and has had a 30% loss in revenue. James’ employer cannot afford to pay any wage to James, but wants to keep him on. James does not want to use his annual leave entitlements.
James’ employer can access the wage subsidy and pay $585.80 per week to James, without James being required to do any work. James retains his annual leave entitlements to use at a different time.
Case study: Able to do some work from home + full-time worker
Tania is a civil engineer. She usually works 40 hours per week at $30 per hour, with a usual gross income of $1200 per week. The business is non-essential and is currently closed and has had a 30% loss of revenue. Tania can do some work from home. She works 30 hours per week.
Tania's employer can access the wage subsidy and pays Tania her usual salary at the agreed reduced hours, which is $900. Tania's employer can use the $585.80 per week to subsidise Tania's wages, this means Tania's employer will top up the wage subsidy with $314.20 to compensate the hours Tania worked.
Case study: Non-essential business + part-time worker
Phil is a HR advisor in a medium-sized business and works part-time. His hourly rate is $25 per hour, and he usually works eight hours a week. The business is non-essential and closed for the lockdown and has experienced a near total loss of revenue.
Phil’s employer can access the wage subsidy. Their revenue has dropped so much that they are worried they will be unable to retain their staff. Under the subsidy scheme requirements, Phil must receive his normal pay of $200 per week, which will be paid from the wage subsidy. His employer can use the remaining money from the subsidy for other affected employees.
Case study: Non-essential business + unable to work
Craig is a waiter at a successful restaurant chain that also needs to close during the lockdown. Craig was getting paid $1,000 per week. Craig’s employer has committed to paying full wages to their staff as they know that such workers will be in demand as the lockdown ends. The restaurant has suffered a 30% loss in revenue due to COVID-19.
Craig’s employer can access the wage subsidy scheme to pay Craig $585.80 per week, and the employer can then top that up with $414.20 per week to ensure Craig receives his full income.
Case study: Essential business + able to work
Steve is an essential services worker, ensuring certainty of electricity supply. Steve is really busy, working his normal hours and getting paid at his normal rate, and his business has not been affected by COVID and does not require support to pay or retain its staff.
Steve’s employer is not eligible for the Wage Subsidy Scheme.
Wage subsidy extension
A Wage Subsidy Extension payment will be available to support employers, including sole traders, who are still significantly impacted by COVID-19 after the Wage Subsidy ends.
The Wage Subsidy Extension will be available from 10 June 2020 until 1 September 2020 so employers can keep paying their employees.
You can't apply for the Wage Subsidy Extension for an employee until their 12 week Wage Subsidy has finished.
Applications open from 10 June 2020.
You must have had, or expect to have, a revenue loss of at least 40% for a continuous 30 day period in the 40 days before you apply, compared to the closest period last year.
It will cover 8 weeks per employee from the date you submit your application.
It will be paid to you as a lump sum at the same weekly rate as the Wage Subsidy.
You'll need to agree to certain obligations, such as to:
pass the subsidy on to your employees
retain your employees for the duration of the subsidy
do your best to pay your employees at least 80% of their normal pay
take active steps to mitigate the impact of COVID-19 on your business.