Tax reform measures included as part of Business Continuity Package
COVID-19 tax updates - 7 April 2020
- Low value asset write off
- Building depreciation
- R&D tax credit refundability
- Use of money interest changes
- Provisional tax rules
On 17 March the New Zealand Government 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 wage subsidies to businesses and the delivery of support for essential services 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 a number of tax initiatives which will provide some relief to taxpayers. All of the tax changes were included in the COVID-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020, which was introduced and passed through Parliament on 25 March 2020. The main tax changes are:
- The ability to take an immediate deduction for any assets costing $5,000 or less from 17 March 2020; this threshold will reduce to $1,000 on 17 March 2021 (noting the current threshold is $500).
- Reintroduction of depreciation on non-residential buildings at the rate of 2% diminishing value and 1.5% straight line from the 2020/21 income year (beginning 1 April 2020 for standard balance date taxpayers).
- Allowing broader access to refunds of Research and Development Tax Credits in the 2019/20 income year.
- Ability to apply for use of money interest write-offs for tax debts post 14 February 2020, if they are due to COVID-19.
- Increase in the threshold before provisional tax applies from $2,500 to $5,000 from the 2020/21 income year.
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 for one year commencing 17 March 2020. From the 17 March 2021, 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).
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 or the straight line rate of 1.5 per cent per annum.
Depreciation will be available to be claimed for commercial and industrial buildings, 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.
You can refer to our separate guidance on the deferred tax treatment of buildings here.
Research and development tax credit refundability
When first introduced the R&D tax credit regime had only very limited refundability in the first year of the scheme, being the 2019/20 income year. This meant there were limited benefits to businesses who were not in a tax paying position. This position was already changing from the second year of the R&D tax credit regime (the 2020/21 income year), whereby the tax credit would be able to be refunded to the extent that the business has paid employment taxes. The COVID-10 Response (Taxation and Social Assistance Urgent Measures) Act 2020 now allows more businesses to cash out a refund in year one.
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. The application process and criteria are still to be developed and will be publicised in the coming weeks, however any payments due on or after 14 February 2020 will be eligible for the new rule.
We strongly recommend that any taxpayers having trouble making tax payments get in touch with Inland Revenue to arrange instalment payments. In order to qualify for the use of money interest waiver taxpayers will need to have applied to Inland Revenue and made the payment as soon as practicable.
Obviously it is important that as much tax as possible continues to be paid to Inland Revenue on the correct due date, and it is essential that businesses continue to file all tax returns on time, even if it is not possible to pay the tax owing.
Changes were made to late payment penalties in recent years, so any penalties will be minimised provided Inland Revenue has been contacted and an instalment process put in place.
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.
The content of this article is accurate as at 7 April 2020, the time of publication. This article does not constitute advice; if you wish to understand the potential implications of current events for your business or organisation, please get in touch.
Alternatively, our COVID-19 webpages provide information about our services and provide contacts for relevant experts who can help you navigate this quickly evolving situation.
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