So, you claimed the wage subsidy, now what?
Tax Alert - October 2020
By Robyn Walker and Blake Hawes
The Wage Subsidy, Wage Subsidy Extension and Resurgence Wage Subsidy (‘the Schemes’) are all now officially closed for further applications. At their height, over 1.66m jobs were being supported and in total there were 756,649 applications approved for the three schemes, including 249,582 self-employed individuals. Over $13.9billion was spent on the Schemes.
The period through which the Schemes provided assistance should now have come to a close for most applicants and the funds received should have been paid out to employees in most instances (only late applicants for the eight-week Wage Subsidy Extension would still be passing through the wage subsidy amount to employees).
So, what now?
Many businesses would consider that their obligations under the wage subsidies finished at the time the subsidy ran out. However, there are some matters which people should still be considering:
- Were all the wage subsidy eligibility criteria met?
- Have all amounts been correctly paid through to employees, and have any ‘unusual’ employment scenarios been correctly dealt with?
- Has the wage subsidy been correctly treated for income tax and GST purposes?
- Have you been compliant with all other tax rules, including calculating PAYE and paying taxes on time?
When it comes to item one, we’re increasingly seeing scrutiny of large wage subsidy claimants and in respect of item four, Inland Revenue have publicly announced they will be completing tax compliance reviews of those who claimed any of the Schemes. What was advertised as a ‘high trust’ regime to apply for, is being followed up with some not so high-trust audits.
Through the Schemes the Government did its part by supporting employment and reducing redundancies, and now it’s the turn of the beneficiaries of the Schemes to ensure they’ve done the right thing.
Were all the wage subsidy eligibility criteria met?
When the eligibility criteria for the Schemes is mentioned, the first thing that comes to mind is the clear, objective “revenue drop” test; a business must have suffered a 30% or 40% (depending on the scheme that was applied for) drop in revenue over a set period. As this measure is objective, in most instances it can be easily satisfied using sales and revenue data. However, there are many other criteria which are not so obvious, that also must be considered.
The most subjective criteria is the requirement to have taken active steps to mitigate the impact of COVID-19 on your business’s activities, which included making insurance claims, proactively engaging with your bank and drawing on cash reserves if appropriate. What is considered to be sufficiently taking “active steps to mitigate the impact of COVID-19” must be self assessed by any business that made a claim on any of the Schemes.
We highly recommend that the assessment against all the eligibility criteria should be sufficiently documented now if it hasn’t been done already. This will prove invaluable in the event a business’s wage subsidy claim is audited by the Ministry of Social Development (MSD) as reconstructing the financial position and environmental context will get harder as time passes. An earlier article published by Deloitte on this topic which includes further information can be found here.
Have all amounts been correctly paid through to employees, and have any ‘unusual’ employment scenarios been correctly dealt with?
In addition to the point above, finer criteria exist around the individual facts of each of the employees named in a wage subsidy application. Businesses who have made a claim on any of the Schemes need to assess whether any of their employees’ circumstances changed during the wage subsidy period, or if the individuals named in their claim were even eligible in the first place.
For example, situations that may cause an employee to not be eligible for part, or all, of the wage subsidy under any of the Schemes include:
- Casual or seasonal workers with varying hours.
- Any new starters or (voluntary) leavers during the Wage Subsidy period.
- Any redundancies during the Wage Subsidy period.
- Whether any employees received ACC income assistance payments during any part of a wage subsidy period.
- Whether any employees received Government-assisted parental leave during any part of a wage subsidy period.
Businesses should undertake a review of their payroll reporting during any of the wage subsidy periods to determine whether any of their overall claim on a wage subsidy should be repaid due to the employees themselves not being eligible for inclusion in the claim, in full or part.
An earlier article published by Deloitte on this topic which includes further information and examples on scenarios where employees may not be eligible under the Schemes can be found here.
Has the wage subsidy been correctly treated for income tax and GST purposes?
Once businesses have determined the correct amount of wage subsidy they are eligible for (taking into account amounts that may be required to be repaid) the GST and income tax treatment must be considered.
The key points in this respect are the following:
For businesses that claimed on behalf of employees:
- The wage subsidies received are not taxable income to businesses (however the on-payment to employees is treated as a normal payment of salary and wages and is taxable in the hands of the employee).
- Businesses do not get a tax deduction for the cost of salary and wages that was funded using a wage subsidy.
- Where the cost of salary and wages that was funded using a wage subsidy was capitalised to the cost base of a depreciable asset, the cost base of the asset used for determining the tax depreciation expense going forward must be reduced by the amount of salary and wages that was funded using a wage subsidy.
- The wage subsidy is not subject to GST.
For self-employed claimants:
- The receipt of the wage subsidy is taxable income – the taxable amount is the total amount received less any amount repaid.
- Where the Wage Subsidy was received in March 2020 but related to two income tax years (i.e. an application was made and payment received before 31 March 2020) an apportionment of the wage subsidy should be undertaken, to include part of the wage subsidy as taxable income in the 2020 income tax year, and the remainder as taxable in the 2021 income tax year.
- The wage subsidy is not subject to GST or ACC levies.
As a result of this taxable treatment for the self-employed, thought should be given to whether the entire amount received was spent when received, as the income tax liability arising upon the receipt of the wage subsidy will be required to be funded from somewhere.
The reason the wage subsidy is taxable to the self-employed but not taxable to businesses is because payments of salary and wages paid to employees of a business that has received a wage subsidy are still taxable to the employee. The income tax exempt status for businesses is to assist in the wage subsidy flowing through the business to the intended recipient without any adverse tax effects.
Have you been compliant with all other tax rules, including calculating PAYE and paying taxes on time?
As mentioned above, Inland Revenue have announced that they will be reviewing employers who have received wage subsidies to ensure they are meeting their tax obligations. This does not mean that where certain taxes have not been paid (or filed on time) the wage subsidies received must be repaid, but will result in Inland Revenue reaching out to those taxpayers and asking the question around why their tax compliance is not up to date.
Businesses that are still struggling to meet tax obligations are able to set up tax instalment arrangements which can allow for the cost of a certain tax bill to be spread over a selected period (i.e. paying a GST output tax liability in three instalments over the three months following the due date of the liability). This can be arranged by contacting Inland Revenue and setting out the specific request (i.e. the amount and frequency of repayments) and the reason why the tax liability cannot be settled in full.
To assist in ensuring all tax obligations are met, and to appease Inland Revenue in the event they ask questions, businesses should put together a comprehensive tax governance plan, to show their commitment to meeting tax obligations on time. More on tax governance is covered in this article.
Changes to the COVID-19 Leave Support Scheme
On 22 September the Government announced changes that will be made to the COVID-19 Leave Support Scheme (‘LSS’). There are two key changes to the LSS:
- The eligibility criteria has been expanded to include more people who are self-isolating because they have been advised to (and a list of people who can officially advise that an employee should self-isolate has also been published) ; and
- The payment period has been reduced to 2 weeks instead of 4.
The Leave Support Scheme is still able to be applied for multiple times (if the two weeks is not sufficient) however no employer may make more than one claim on the Leave Support Scheme for the same employee at the same time.
October 2020 Tax Alert contents
- So, you claimed the wage subsidy, now what?