The COVID-19 Tax Response Act that supports the package of economic and social measures aimed at providing relief to those that have been economically affected by Covid-19 has been enacted. It is unsurprising that the Government has acted swiftly (within a day) to urgently pass this legislation.
We have compiled a list of the key tax related issues to help you navigate the recent changes.
- Wage subsidy and leave payments are non-taxable income and non-deductible to the employer and also exempt from GST. Click here for more details about these subsidies. Note that the eligibility criteria for leave payments remain unchanged. So this subsidy is not available for self-isolation required by the compulsory pandemic lockdown. However, as of 4pm on 27 March 2020 the Government folded the original leave scheme into the wage subsidy scheme. The original sick leave scheme was design when few people were in self-isolation and it is no longer fit for purpose.
- Wage subsidy and leave payments are processed as part of the employee’s normal wages and subject to PAYE, Kiwisaver, Student Loans, child support deductions as normal. Leave payments must be passed through to employees directly over the leave period (although leave payments will no longer be relevant from 27 March 2020 as noted above).
- For sole traders and self-employed, the wage subsidy and leave payments are taxable as they are payments to replace loss of earnings.
Taxes and Relief
- Inland Revenue now has the ability to remit interest and penalties accrued on tax payments due on or after 14 February 2020 if the taxpayer’s ability to make the payment on time was significantly adversely affected by the COVID-19 outbreak. This concession will last for 24-months from 26 March 2020.
- Inland Revenue have however announced taxpayers unable to pay taxes on time due to the impact of COVID-19, don’t need to contact Inland Revenue right now and to get in touch when possible, and Inland Revenue will write-off any penalties and interest. The have however stated that It would help if taxpayers continue to file , as the information is used to help the Government continue to respond to what is happening in the economy. This is pleasing and we look forward to further communication on the detailed guidelines.
- If for some reason you do not meet the waiver criteria or you are having cash flow issues, tax pooling can be of assistance. Talk to us if you need more information.
- There are three upcoming tax payments of importance (aside from payroll taxes):
- 30 March 2020 - 2nd instalment of provisional tax due for 30 June balance dates;
- 7 April 2020 – 2019 terminal tax;
- 7 May 2020 – 3rd instalment of 2020 provisional tax and due date for 2 and 6 monthly GST returns ending 31 March 2020.
Taxpayers should as a first step model their cash flow for the next 3 to 12 months to determine when, and what tax payments can be made and to ask Inland Revenue for relief as soon as practicable.
Other Measures Enacted
- Key measures were identified in our earlier publication . The Act now has additional detailed and we have commented more extensively on these below.
- Depreciation for buildings , apart from buildings primarily used for residential accommodation, has been restored. This is a permanent change and will apply with effective from the 2020-21 income year. The new depreciation rate will be 2% declining value or 1.5% straight line. With regard to the definition of “residential buildings”, dwellings, houses and apartments that are owner-occupied, rented or used primarily as a place of residence, and short-term accommodation (such as baches rented out) which has less than four units on the property are “residential buildings”. This means that motels and hotels will be depreciable buildings but other small scale short term accommodation will not.
- The application date of broader refundability rules for R&D tax credits has been brought forward one year to the 2019-20 income year, allowing more businesses to access this tax credit sooner. The ability to obtain a refund of R&D tax credits was limited in year one with a transitional provision allowing up to $255k cash refund for loss-making businesses that met wage intensity and corporate eligibility criteria. The broader refundability rules remove the wage intensity and corporate requirements imposed by the limited refundability rules, as well as extending the refundable amount from $255k to a labour-related tax amount.
- Inland Revenue has also announced time bar relief for those 2019 income tax returns that have not been filed as at 31 March 2020 as a result of Covid-19. Inland Revenue is prohibited from increasing an assessment of income tax, after 4 years from the year in which the income tax return is filed. So for 2019 tax returns filed by 31 March 2020, Inland Revenue has until 31 March 2024 to increase an assessment of tax (note this is overridden where Inland Revenue considers the tax return filed is fraudulent or wilfully misleading). Late tax return filings will have the effect of extending the time bar in section 108 Tax Administration Act 1994 to 31 March 2025 (instead of 31 March 2024). Due to the impact of COVID-19 and related potential for filing delays, as at 31 March 2024 Inland Revenue will close any review or other compliance activity for any 2018/2019 income tax return which is:
- Due on or before 31 March 2020 and is furnished after 31 March but before 31 May 2020;
- Not subject to any existing exclusions from the standard 4 year time bar;
- Not subject to a dispute;
- Commenced by NOPA (notice of proposed adjustment) issued before 1 January 2023, and
- Involving alleged tax avoidance, or
- Having tax in dispute of greater than $200 million.
Inland Revenue may need to clarify the circumstances of any delay in filing. This is limited to the effects of the COVID-19 virus.
It is pleasing to see these measures being enacted so swiftly and we look forward to receiving more details guidance on the use of money interest waiver so taxpayers can have greater certainty. In the meantime, taxpayers should:
- Consider their cash flow and tax payment projections as to what practicably can be paid in the next 3 to 12 months;
- Review whether provisional tax estimates are necessary to reduce payments and, potentially, obtain refunds if provisional tax has been overpaid;
- Review GST return filing periods and whether it is feasible to amend periods or their accounting basis.
- Consider other measures to assist with cash flow such as deferral of rental payments, mortgage holidays and business support measures signalled by the Reserve Bank.