Budget 2020: Tax
Should tax be in the background or at the forefront of the fight back against COVID-19?
A tax person is probably the wrong person to answer the question posed by the title, as the answer will always be that tax should be at the forefront, if for no other reason than selfish professional interest. Tax has featured heavily in the initiatives announced to help the economy respond and recover from COVID-19. Inevitably, as the country looks to rebuild from the setbacks of COVID-19, tax will continue to feature; it will be future tax collections that repay the additional borrowing funding the COVID-19 response. Budget 2020 has not signalled any change in direction for the tax system. Predictably, in an election year, there is no overt signal of increases in tax rates at this juncture. New tax initiatives announced on 14 May are few and far between, with the most significant announcement being a commitment to progressing with the previously announced amendments for blackhole feasibility expenditure. While not directly tax related, the $3.2 billion extension of the wage subsidy scheme will be welcome; and Budget 2020 also provides a new favourable loan facility (to be delivered by Callaghan Innovation) for R&D intensive businesses of up to $100,000 to complement the existing R&D tax credit regime.
Prior to Budget 2020, the Government response to COVID-19 has been to introduce a range of overdue business tax initiatives, costing over $5.9 billion. In addition, there is $10.6 billion spent helping businesses pay their employees through the initial wage subsidy scheme and up to $6.25 billion to be lent to small businesses under the Small Business Cashflow Scheme (applications in excess of $280 million have been approved within two days of the scheme opening). Taken together, businesses should be feeling more appreciated than at any other point in the last decade.
When comparing the initiatives of 2020 to the business tax announcements included in Budgets 2010 through 2019 (see the table below), it is clear businesses have not been on the receiving end of much good news over the last decade. In fact, most Budget tax announcements have been base maintenance and extensions to the taxation of business, with the negative business initiatives exceeding the business positive initiatives by over 3.5:1. If nothing else, the COVID-19 pandemic has bought new focus to the importance of business to our country’s wellbeing and economic recovery.
While the choice of initiatives will inevitably be criticised by some, the Government is to be commended for its ability to make fast and bold decisions, focussed on putting cash back into the hands of businesses. In years gone by, the suggestion of reinstating depreciation on buildings was met by polite agreement that it was the right policy answer, but too expensive. Likewise, the suggestion of increasing the low value asset threshold from $500 was regularly dismissed due to its expense.
Perhaps one understated initiative taken by the Government has been allowing Inland Revenue discretion to remit use of money interest on unpaid tax for organisations impacted by COVID-19. While this may seem like a minor technical change, in practice it gives the Crown the ability to give an interest-free loan to businesses. When you include taxes like GST and PAYE which are going unpaid, the numbers can quickly escalate well beyond what may be on offer under the Small Business Cashflow Scheme. The OECD has been advocating tax deferrals such as these as a way for governments to help taxpayers at this time; the interest remission essentially facilitates the same outcome.
COVID-19 tax announcements in 2020
- Reinstatement of depreciation on non-residential buildings
- Increase in the low value asset write-off from $500 to $5,000 for one year, then a reduction to $1,000
- The ability to remit use-of-money interest when taxes are unpaid due to COVID-19
- An increase in the provisional tax threshold from $2,500 to $5,000
- The introduction of a temporary loss carry-back rule for two years, and replacement with a permanent measure in the second half of 2020
- The introduction of a same or similar business test for carrying forward tax losses in the second half of 2020
- The introduction of Commissioner discretion to help taxpayers meet tax obligations
- Inland Revenue to administer the Small Business Cashflow (Loan) Scheme
However, tax has a role to play as New Zealand moves from responding to recovering and thriving in the aftermath of COVID-19. Additional short-term measures which could still be considered (and recommended by the OECD) include:
- Waiving certain payroll taxes (for example, employer superannuation contribution tax, providing exemptions from fringe benefit tax)
- Simplifying requirements to claim tax deductions and claim back GST on bad debts
- Providing alternative options for calculating provisional tax without exposing taxpayers to the risk of use-of-money interest if they get it wrong (for example reducing the 105% uplift calculation to 70% of prior year taxable income)
When considering how tax could help New Zealand recover, infrastructure investment is important, so ensuring our tax settings encourage the foreign capital we’ll need to help fund these projects will be key. We’re also likely to see a greater move from employment relationships to gig-economy workers, so ensuring the tax system allows these workers to comply with taxes in a low-cost way will be important to maintain high levels of tax compliance.
Over the longer term, in order to repay the concessions of today, there will need to be a discussion about either broadening the tax base; increasing progressivity (the top marginal tax rate dropped from 39% in 2009 but was as high as 66% in the 1980s); or finding another solution such as solidarity levies. The increased taxation of the digital economy is also likely to come back into the limelight, with the Budget documents including a statement that it is important that “multinational companies and those in the digital services field” pay their fair share of tax.
The key will be to strike a balance; while New Zealand may be on the cusp of being a COVID-19 free wonderland, mobile capital and labour will search out alternative homes if tax becomes disproportionately high (and the rest of the world catches up with our COVID-19 containment success).
A targeted extension to the Wage Subsidy Scheme
The current Wage Subsidy Scheme runs its course on 9 June. From 10 June, a more targeted scheme will take its place. Businesses will need to have suffered a 50% reduction in revenue for the 30-day period up to the application date; as compared to the nearest comparable period in 2019 in order to be eligible. The other eligibility criteria are expected to stay largely the same; high growth businesses and new firms will continue to calculate their eligibility as under the existing scheme. A new initiative is to allow pre-revenue R&D start-up firms recognised by Callaghan Innovation to also be eligible.
Eligible businesses will receive a further 8 weeks of Wage Subsidy funding at the current rates. There will be a 12 week period where applications will be open (10 June to 2 September 2020). The additional cost of the Wage Subsidy extension is $3.2 billion and is expected to particularly help the tourism, hospitality and retail sectors.