The wage subsidy debate continues… over a year on, was the scheme a success? And are you safe from audit?
Tax Alert - June 2021
By Robyn Walker and Blake Hawes
For some of us it may feel like it was just yesterday, for others it’s a distant memory – either way in March we marked an entire year since New Zealand entered one of the world’s strictest lock-down to stop the spread of COVID. That also means more than an entire year has passed since the introduction of the Government’s original wage subsidy, the financial lifeline that kept thousands of businesses afloat and many more Kiwi’s employed.
While there were many critics of the wage subsidy it was considered overall a huge success in its aim to get cash out to support businesses quickly. Now, as the dust settles a year later, the success and downfalls of the Wage Subsidy have been reviewed. On 4 May 2021 John Ryan, the Auditor General of New Zealand, published a report on the management of the Wage Subsidy Scheme.
The report provides an unbiased review of the three wage subsidies rolled out during 2020 (the wage subsidy, wage subsidy extension, and the resurgence wage subsidy) including the set-up and administration of the wage subsidy, the integrity of such a high trust scheme and its monitoring and management.
Overall the report is positive, it provides deserving recognition to the many public servants who worked countless hours in setting up one of New Zealand’s biggest social welfare systems practically overnight. The report also applauds the Government for the efficiency and speed with which payments were made to applicants. The average number of days it took to make a wage subsidy payment to an applicant was 3.48 days, with the average number of days to make payment for the resurgence wage subsidy being as low as 1.82 days. This was an element of the scheme that was applauded by many during 2020 and was a key factor in jobs being saved.
Further statistics are provided which paint a picture of who claimed the wage subsidy and where the support was actually provided. Of the 735,111 payments made across the three wage subsidies, more than 99% were for less than $1m. In respect of the original wage subsidy, of the 99% of claims that were for less than $1m the average payment was only $19,882 with these numbers being massively impacted by the high number of claims being made by the self-employed. While some big payments were made, a significant proportion of the $14billion spent on the wage subsidy went to small businesses.
While these statistics are impressive, the report does bring to light that the eligibility criteria for the three wage subsidies were not always clear. An example of this was the uncertainty around what constituted “active steps to mitigate the impact of COVID-19”.
One step further from the comments regarding “vague” and “ambiguous” criteria, the report specifically notes that there were clearly cases of fraudulent behaviour, evidenced by certain pre-payment review procedures and post-payment audits. It is noted in the report that the complaints process and publishing the names of recipients aided in detecting fraud and encouraging repayment from claimants who were not eligible.
In this respect the report sets out two broad recommendations:
- Ensure that criteria are sufficiently clear and complete to allow applicant information to be adequately verified; and
- Put in place robust post-payment verification measures, including risk-based audits against source documentation, to mitigate the risks of using a high-trust approach.
In relation to point two the report specifically recommends:
In relation to the Wage Subsidy Scheme, we recommend that the Ministry of Social Development prioritise remaining enforcement work, including:
- seeking written confirmation from applicants (which could be targeted towards larger or risk-indicated applicants) of compliance with the eligibility criteria and the obligations of receiving the subsidy; and
- pursuing prosecutions to recover funds and/or to hold businesses to account for potentially unlawful behaviour.
The recommendation by the Auditor General of New Zealand to seek written confirmation from all applicants indicates the importance that is being placed on the mitigation of fraud. If you made a wage subsidy application at any point last year and didn’t fully prepare documentation verifying your eligibility to your claim, now might be a good time to do this. An earlier article written by Deloitte provides steps and procedures that can be taken to document your eligibility.
When reviewing a wage subsidy claim many people will recall the most prevalent and objective of the eligibility criteria being:
- The revenue decline test – note, that while applications could be made on the basis of the predicted revenue drop, this needed to subsequently be verified as having actually occurred; and
- Paying your employees at least 80% of the ordinary salary and wages, or if not possible, passing through the entire value of the wage subsidy.
However some may forget the more subjective, and commonly overlooked, requirement which was to “take active steps to mitigate the impact of COVID-19”. While not an exclusive list, the eligibility criteria included drawing from cash reserves, making insurance claims and proactively engaging with the bank. This requirement of applicants is specifically noted in the report as one that was not clearly defined and likely to have been overlooked.
If you are reviewing a wage subsidy claim made last year we recommend thoroughly checking the claim against every part of the eligibility criteria, which can still be found online here.
As the New Zealand Government looks to pay down the debt that arose from the frantic COVID-19 spending and at the same time fund the various initiatives in the recent Budget, securing Government revenue becomes more crucial than it has ever been.
If you think you may need to review your claim from last year now is the time to do so. In the heat of the moment, and in the height of the COVID-19 pandemic, making a claim may have seemed like the right option at the time, but now looking back perhaps that wasn’t the case. Instructions on how to make a wage subsidy repayment are available here.
For more insights or advice, please contact your usual Deloitte advisor.
June 2021 Tax Alert contents
- New business continuity test – Inland Revenue releases guidance
- Intra-group service charges – are your group’s processes up to date?
- The wage subsidy debate continues… over a year on, was the scheme a success? And are you safe from audit?
- Advantage sports: being a team player can reduce your tax bill
- Are your records up to standard?
- Mileage reimbursement rates – what you need to know
- Snapshot of recent developments