Tax reform measures included as part of Business Continuity Package
Special edition Tax Alert - 17 March 2020
Today the New Zealand Government has announced a substantial $12.1billion business continuity package aimed at assisting businesses through the COVID-19 situation. The largest element of the package is the delivery of $5.1billion in wage subsidies to businesses (valued at up to $150,000 per business) and the delivery of support for workers needing to self-isolate, delivered through the Ministry of Social Development (more information on the subsidies is available here).
Included within the package were four specific tax initiatives which will provide some relief to taxpayers. These announcements are:
1. The ability to take an immediate deduction for any assets costing $5,000 or less in the 2020/21 income year (beginning 1 April 2020 for standard balance date taxpayers); this threshold will reduce to $1,000 in the 2021/22 income year (noting the current threshold is $500).
2. Reintroduction of depreciation on commercial and industrial buildings at the rate of 2% from the 2020/21 income year (beginning 1 April 2020 for standard balance date taxpayers).
3. Ability to apply for use of money interest write-offs for tax debts post 14 February 2020, if they are due to COVID-19.
4. Increase in the threshold before provisional tax applies from $2,500 to $5,000 from the 2020/21 income year.
A fact sheet explaining these initiatives is available here.
Legislation is currently being prepared for each of these initiatives and our expectation is that Parliament will shortly begin the process of considering the legislation as a matter of priority.
We discuss each of these measures in more detail below.
Low value asset write-off
The ability for businesses to claim immediate deductions for low value assets up to the value of $5,000 will be a welcome incentive to invest in assets. This comes at a time when many businesses may be investing in technology assets to ensure that employees are able to able to work from home if needed. The existing tax rule allows an immediate deduction for assets up to a value of $500; noting that there are some caveats to this rule which we expect will also apply to the new $5,000 threshold:
• If multiple assets with the same depreciation rate are acquired from the same supplier at the same time, the $5,000 threshold applies across all the assets acquired (it is not a per asset threshold);
• If the asset being acquired actually forms part of another item of depreciable property an immediate deduction is not available.
This change is a temporary measure which applies only for the 2020/21 income year. From the 2021/22 income year, the threshold will move back to $1,000, which is still a significant improvement on the existing $500 threshold (which has not been increased since 19 May 2005).
For businesses with a 31 March, or earlier balance date, these changes will essentially be effective almost immediately (or retrospectively), but businesses with late balance dates (for example June or September) will need to wait for the initiative to take effect.
Reintroduction of building depreciation
Most buildings have not been eligible for tax depreciation since 2011; however with effect from the 2020/21 income year, certain buildings will once again be able to be depreciated using the diminishing value method at a rate of 2 per cent per annum. This will be available for commercial and industrial buildings (including hotels and motels), but not residential buildings.
Importantly, any seismic strengthening costs are also eligible to be included in the depreciable value of commercial and industrial buildings. It is noteworthy that this is a permanent rather than temporary measure.
For those working in tax back in 2010, you may recall that the removal of tax depreciation from buildings had an unexpected negative impact on financial reporting results; as the removal of tax depreciation resulted in deferred tax liabilities needing to be recognised upfront. For businesses still owning buildings from 2010 there may be a positive financial reporting outcome as a result of this reinstatement of depreciation. We will prepare and share separate guidance on the financial reporting implications of the building depreciation change.
Use of money interest changes
Businesses who have found themselves making tax payments late as a result of being “significantly adversely impacted by COVID-19” will be able to apply to Inland Revenue to have any use of money interest on late tax payments remitted by Inland Revenue. There is no indication that there will be any changes to penalty rules. The application process and criteria are still to be developed and publicised in the coming weeks, however any payments due on or after 14 February 2020 will be eligible for the new rule. Obviously it is important that as much tax as possible continues to be paid to Inland Revenue on the correct due date, therefore we expect there will be strict criteria to be met.
Provisional tax rules
Currently any taxpayer with a residual income tax liability (essentially income which is not correctly taxed at source) of $2,500 is required to pay provisional tax. This puts compliance costs on taxpayers who have relatively modest tax liabilities. From the 2020/21 income year this threshold will be increased to $5,000.
While not appearing significant, it is anticipated that this could remove upwards of 95,000 taxpayers from the provisional tax rules.
Other tax consequences
Businesses who are in receipt of wage subsidy scheme payments and COVID-19 leave and self-isolation leave will need to consider the tax treatment of the subsidies. While information is not currently available, our expectation is that the subsidies will be a non-taxable receipt, but similarly a tax deduction will be unavailable at the time the subsidy is spent. We expect that these payments are likely to be specifically exempted from GST.
For COVID-19 leave and self-isolation payments, we would expect that employers will receive a gross amount from the Ministry of Social Development, with a requirement to withhold PAYE (and other standard deductions) from the on-payment of this amount to affected employees.
We are seeking clarification on the points above.
If you would like more information on how these announcements could impact your business, please get in contact with your usual Deloitte advisor.
Three of the measures announced will apply from the 2020/21 income year. This means the application date changes based on the balance date used by the business. The application dates for common balance dates are listed below:
December: 1 January 2020
March: 1 April 2020
June: 1 July 2020
September: 1 October 2020