What are the tax obligations which come with claiming COVID-19 Government support?
Tax Alert - March 2021
By Robyn Walker
Current business and employee support
With Auckland currently sitting in Alert Level 3 and the remainder of New Zealand sitting at Alert Level 2, there is a range of government support available for businesses and their employees. You can read more about the wage subsidy, resurgence support payment, leave support, and short-term absence payment schemes here.
Businesses around the country have been in receipt of a range of different support packages from the Government over the last year. Almost 760,000 businesses and sole traders have claimed wage subsidies or claimed under the leave support scheme; 18,234 have since made repayments of the wage subsidy. In February, applications opened for the new Resurgence Support Payment in respect of the February 14 Alert Level change.
While many businesses are focused on survival, it’s important that businesses who have claimed support understand the obligations on them in relation to both income tax and GST; to ensure they’re not under-paying or over-paying tax by taking an incorrect position in an income tax or GST return.
Wage Subsidy / Leave Support Scheme / Short-Term Absence Payment
The Government’s Wage Subsidy, Leave Support and Short-Term Absence Payments are paid to employers in order to be passed on to employees. Other than self-employed recipients, which are covered below, the receipt of any assistance through any of these schemes is treated as “excluded income” for the employer (albeit is taxed in the hands of the employees when they are then paid their salary and wages). What this means is fairly simple, the amount is not subject to income tax in the hands of the employer but on the flipside, a tax deduction cannot be claimed for salary and wage costs to the extent they were funded by the payment from the government.
For example: MacDonalds Motors Limited (MML) claimed $250,000 in wage subsidies in the year ended 31 March 2021. MML also spent $1,000,000 on salary and wages. MML does not include the $250,000 wage subsidy as income in its tax return, but it can only claim $750,000 as a tax deduction for its salary and wage expense.
For self-employed persons, the receipt of one of these payments is taxable and needs to be included as income in the individuals IR 3 tax return. This is because they are the end beneficiary of the payment, which is different from an employer who is acting as an intermediary step between the government and the employee.
From a GST perspective, all payments granted under the wage subsidy, leave support and short-term absence payment schemes are all specifically excluded from GST. No GST output tax should have been returned for any wage subsidies, leave support scheme payments or short-term absence payments.
Wage subsidy repayments
Employers who have elected to make repayments of any government assistance need to ensure that the reversal is also treated correctly from a tax perspective. An important point to note is that if a repayment has been made, this is treated as a reversal of the government grant, and as such, a tax deduction is now able to be claimed for the salary and wage costs at the time they were paid. If a business has made a repayment in the year after the payment was originally received, the salary and wage costs still need to be adjusted in the year they were paid rather than the year the repayment was made.
For example: MacDonalds Motors Limited (from the previous example) has recovered well from COVID-19 and its shareholder Hugo decides in May 2021 that the company is in a better financial position such that it wants to voluntarily repay $100,000 of the wage subsidy previously received. MML should now claim a tax deduction for a total of $850,000 as salary and wage costs in its tax return for the year ended 31 March 2021.
Resurgence Support Payment
Since Tuesday 23 February 2021, businesses (including the self-employed) have been able to apply for the Resurgence Support Payment if they have suffered a 30 percent or greater loss of income as a consequence of the elevated COVID-19 Alert Levels. The scheme can be applied for each time there is an escalation in COVID-19 Alert Levels for a period of seven days or more. As such, applications can be made for two periods to date:
- 14 February to 22 February 2021 – applications opened on 23 February and remain open until 23 March 2021
- 28 February for an unknown period exceeding seven days – applications expected to open on 8 March and remain open for one month
These payments are designed to assist businesses with cashflow and there is no requirement for businesses to pass this payment through to employees, rather it can be used to meet any business expenses. The payment includes a core per business rate of $1,500 plus $400 per employee up to a total of 50 FTEs. The maximum payment available is $21,500. More details about the Resurgence Support Payment are available from Inland Revenue.
The Resurgence Support Payment is not subject to income tax. Consequently, tax deductions cannot be claimed for expenses to the extent they are funded by the Resurgence Support Payment.
The Resurgence Support Payment does however differ in relation to GST. Any recipient of the payment that is registered for GST is required to include the GST portion (3/23rd) of the payment received as GST in their next GST return. The business will then also be able to claim back GST when the money is spent.
For example, MacDonalds Motors Limited has met the eligibility criteria to claim the Resurgence Support Payment. MML has 20 employees, it receives $9,500 on 25 February 2021. MML includes $1,239 as GST output tax in its next GST return due on 28 March 2021. MML spends the payment on additional personal protective equipment for staff and uses the balance to help fund its car yard rental charge. Provided it holds tax invoices, MML can claim back GST on all these expenses.
A word on transfer pricing for multinationals
While the various government support payments are not subject to income tax, multinational businesses need to ensure that government support packages both in New Zealand and overseas are correctly treated from a transfer pricing perspective. In particular, the recipient of a wage subsidy should not be treated as a reduction in costs for the purposes of determining the arms-length price to be charging an associated party. You can read more about this in our previous article here.
March 2021 Tax Alert contents
- What are the tax obligations which come with claiming COVID-19 Government support?
- The tax cost of your fringe benefits is about to increase
- The new 39% tax rate puts tax structuring back into the spotlight – why it may be time to talk about tax avoidance