Big changes to New Zealand’s tax system have been made in a small timeframe to help businesses deal with the cashflow crunch they’re experiencing during this period of unprecedented disruption.
Below is an overview of these changes; if you need support and advice about your business’s current tax position, get in touch with one of our tax experts.
- Tax loss carry back
- Use of money interest relief
- Depreciation on commercial buildings
- Upfront deduction of low value assets
- Increase in provisional tax threshold
- Research & development tax credit refundability
- Wage subsidy receipts and payments to employees
- Small Business Cashflow loan scheme
- 31 March deadline implications
- Insurance payments to businesses
- Specific GST issues
- Specific FBT issues
- International disclosure requirements
- Tax residency implications
- Working from home allowances
- Changes to the tax loss continuity rules
- Discretion and greater flexibility to modify statutory tax deadlines
Tax loss carry-back
The Government has released the COVID-19 Response (Taxation and Other Regulatory Urgent Measures) Act to introduce a tax loss carry-back mechanism that allows a taxpayer to carry back tax losses to the immediately preceding income year. Without this measure, taxpayers can only carry forward tax losses to reduce taxable income in future years.
This tax loss carry-back scheme is temporary and applies to losses incurred in the 2020 and 2021 income years. The Government plans to propose a permanent carry-back scheme for the 2022 income year onwards. This is currently in development and we expect further details to be issued later this year.
To be able to carry back losses, the taxpayer must have made or estimated that they will make a loss in the 2020 or 2021 income year, and have had taxable income in the previous year. The loss carry-back can be claimed in the relevant tax return or via a secure mail request on myIR. The taxpayer can decide how much loss to carry back. Any losses that are not carried back will be carried forward subject to the current loss continuity rules.
The loss carry-back scheme enables taxpayers to claim a refund of tax paid. This is done by either:
- Re-estimating provisional tax for the 2020 income year
- Taxpayers can re-estimate up until the due date for the 2020 income tax return.
- For example, if a taxpayer is in a profit position for the 2020 income year and estimates a loss for the 2021 income year, they can carry back the estimated losses to the 2020 income year and re-estimate the 2020 provisional tax liability. Any 2020 provisional tax already paid in excess of the new estimate can then be refunded.
- Amending the 2019 or 2020 income tax return
- Note the statutory time bar is automatically extended if a return is amended
- For example, if a taxpayer was in a profit position for the 2019 income year and estimates a loss for the 2020 income year, they can request a reassessment of the 2019 income tax return to carry back the estimated losses. This reduces the 2019 taxable income and a tax refund will arise
If the taxpayer overestimates the loss carry back which then results in an underpayment of tax, use of money interest (UOMI) will apply from the date the underpayment of tax arose until the tax is paid in full to Inland Revenue.
Use of money interest relief
Inland Revenue now has discretion to remit use of money interest (UOMI) for payments due on or after 14 February 2020 in situations where the taxpayer’s ability to pay has been affected by COVID-19. This applies to all types of tax payments and will be available until 25 March 2022. Inland Revenue have also signalled they will look to remit late payment penalties.
To be eligible for UOMI relief the payment must relate to a tax payment date that falls after 14 February 2020 and the business must also be able to demonstrate that their ability to pay by the due date has been significantly affected by COVID-19. The taxpayer is expected to contact Inland Revenue to request the relief and will also be required to pay the outstanding tax.
Inland Revenue’s view is that a taxpayer has been significantly adversely affected by COVID-19 financially if their income or revenue has reduced as a consequence of COVID-19 and, as a result of that reduction in income or revenue, is unable to pay their taxes in full and on time.
Taxpayers should continue to file their tax returns (GST/ PAYE/FBT etc.) on time and should be able to provide the following, if asked:
- Bank and credit card statements dating back three months
- Any management accounting information
- A list of aged creditors and debtors
Inland Revenue will not ask for additional information in every case, however it helps them to understand the taxpayer’s plan to sustain their business. Inland Revenue acknowledges that there may be difficulties in obtaining specific information and will work with the taxpayer based on what they can access at this time.
Taxpayers with pre-existing debt arrangements who have been affected by COVID-19 are encouraged to contact Inland Revenue as soon as they believe they will have difficulty in meeting the current terms.
To obtain relief from UOMI open communication and transparency must be maintained with Inland Revenue; we advise against ignoring payment deadlines or not paying altogether.
Depreciation of commercial buildings
Depreciation for non-residential buildings, which was suspended from the 2012 income year, has been reintroduced at 2% diminishing value (based on the tax book value of the building at 31 March 2020) or 1.5% straight line (based on the cost of the building plus any improvements made). The deduction is available from the 2021 income year.
This will apply to new and existing buildings and includes hotels and motels. Residential buildings such as dwellings are explicitly excluded from this amendment. For buildings used for short-term accommodation, depreciation will only be allowed where there are four or more separate units within the same property. This will be relevant for Airbnb owners determining whether the change applies to them.
Any capital improvements to the property, including seismic strengthening, will also be depreciable.
The ability to apply for a special depreciation rate for non-residential buildings has also been reintroduced.
Businesses should ensure that their fixed asset registers are updated with the new rates.
Upfront deduction of low-value assets
Expenditure on capital assets is generally non-deductible and must be capitalised and depreciated over time. The Government has introduced a concession for low value assets where taxpayers may now claim an immediate deduction for the purchase of assets that cost up to $5,000 (previously $500). This increase is temporary and applies to purchases made between 17 March 2020 and 16 March 2021.
The threshold is applied to the GST exclusive amount and any assets of the same class purchased at the same time are lumped together. For instance, a purchase of a laptop costing $2,600 can now be deducted in full. But if two laptops at $2,600 each are purchased at the same time from the same supplier they are treated as exceeding the $5,000 threshold and must be capitalised.
The increased threshold will reduce tax compliance costs for business (as it reduces the number of assets that need to be capitalised and depreciated) and also should ease cash flow pressure by reducing income tax payable for the 2021 income year.
The low value asset threshold will permanently reduce to $1,000 for assets purchased on or after 17 March 2021. This is still double the pre-COVID-19 amount.
Increase in provisional tax threshold
The COVID-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020 introduced an amendment to permanently increase the provisional tax threshold from residual income tax of $2,500 to $5,000. This change takes effect from the 2021 income year.
Most taxpayers will have March balance dates meaning their first instalment of 2021 provisional tax is due on 28 August 2020. Therefore, if the 2020 residual income tax is expected to be below $5,000, the 2020 tax return should be filed before this date to take advantage of this change when paying the first instalment of 2021 provisional tax.
Research & development tax credit refundability
Improved refundability of the R&D tax credits originally intended to take effect from the 2021 income year has now been brought forward to take effect from the 2020 income year. The cap of $255,000 per year has been replaced with the cap now being equal to the total employment related taxes paid (PAYE, ESCT and FBT) in the income year. Non-corporate entities can also access the refund (previously only available to companies). The R&D tax credit regime grants a tax credit of up to 15% on eligible expenditure.
Research and development activities are broadly defined as:
- a systematic approach with the material purpose of creating new knowledge or new or improved processes, services or goods that has a material purpose of resolving scientific or technological uncertainty.
Wage subsidy receipts and payments to employees
Wages and salaries paid to employees are not deductible to the extent covered by the wage subsidy
The wage subsidy is exempt income for the employer under the Income Tax Act 2007. This also means that the wages paid out of the wage subsidy to employees are not tax deductible. The amount of wages paid in excess of the wage subsidy are deductible as normal.
Employers should track the amounts paid to employees. This is particularly important where the subsidy was received prior to 31 March as the deductions may cover two income years. A separate general ledger code could be used to track the payments made. Alternatively, a more pragmatic approach could be to prorate the subsidy between 31 March 2020 and 31 March 2021 based on the number of days covered in each period.
The wage subsidy received is not liable for GST. The Goods and Services Tax (Grants and Subsidies) Amendment Order 2020 was enacted on 25 March 2020 to ensure that COVID-19 related subsidies are exempt from GST. This applies to payments made from 17 March 2020.
Businesses should ensure that the wage subsidy received is applied to a separate general ledger code so that tax is not inadvertently paid on this amount. The code should be GST exempt so that accounting software does not incorrectly pay 15% of the wage subsidy to Inland Revenue.
Small Business Cashflow Loan scheme
The Small Business Cashflow Loan scheme was introduced to support businesses struggling due to the loss of actual or predicted revenue as a result of COVID-19. The measures were included in the COVID-19 Response (Taxation and Other Regulatory Urgent Measures) Act 2020 passed on 30 April 2020.
- One-off loan of up to $100,000 to firms employing 50 or fewer full-time equivalent employees
- The loan amount is calculated as $10,000 for an applicant plus $1,800 per full time employee
- The eligibility criteria are:
- The wage subsidy scheme criteria set out above, plus:
- A declaration that the business is viable and will use the money for core business operating costs
- The business and Inland Revenue will have a legally binding loan contract
- The loan will be for a maximum five years with repayments not due in the first two years
- No interest is charged if the loan is repaid within the first year. A 3% interest rate applies otherwise
- The wage subsidy scheme criteria set out above, plus:
Businesses can use the IRD’s loan calculator to work out how much they can borrow under the scheme. Applications are made through myIR and open from 12 May 2020 to 12 June 2020 inclusive.
31 March 2020 deadline implications
Late filing and time bar for 2019 income tax returns
Taxpayers are encouraged to file their 2019 income tax returns as soon as possible. Inland Revenue will be waiving late filing penalties in these circumstances. This also means that the time bar is extended to 31 March 2025 (previously 31 March 2024). The delay in filing is limited to effects of COVID-19.
Late filing of LTC elections due 31 March 2020
The Commissioner will accept late LTC elections if the owners were unable to complete the election on time due to COVID-19. The election must be filed as soon as possible. New companies incorporated during the 2020 income year must file the LTC election no later than 31 May 2020.
Extension of the due date for Basic Compliance Packages
All taxpayers required to submit a BCP with Inland Revenue have until 30 June 2020 to complete this. Inland Revenue have notified these taxpayers via myIR.
If a taxpayer’s business has been disrupted due to COVID-19, they may have received an amount under their insurance policy for the loss of income. These receipts are deemed to be income and are subject to income tax and GST.
Specific GST issues
A GST adjustment arises if a taxpayer has returned GST on a supply that is subsequently cancelled. A credit note showing the cancelled supplies must be raised to support any adjustments made.
Businesses that have closed due to the COVID-19 lockdown may need to de-register from GST. The taxpayer must seek de-registration within 21 days of the cessation of taxable activity. Whether or not a taxable activity has ceased will depend on the circumstances of each case.
Exporters now have an automatic 3-month extension to supply exported goods at a zero-rate. The extension begins on the day after the 28-day period expires and applies to the supply of goods up to and including 31 July 2020. The taxpayer must advise Inland Revenue if they believe the delay in exporting will be longer than 3 months.
Specific FBT issues
The Commissioner released a public statement advising that motor vehicles provided to employees would continue to attract an FBT liability during the COVID-19 lockdown. The Commissioner’s view is that the motor vehicle was made available for the employee’s private use, even if it the employee’s use was restricted to accessing essential services or working in an essential business at the time.
International disclosure requirements
Breach of Advance Pricing Agreement conditions
Inland Revenue is aware that current Advance Pricing Agreements (APAs) may be impacted during the COVID-19 epidemic. No rulings have been issued at this stage given the uncertainty of the disruption and how it will affect different sectors and
Late filing of International disclosures
Controlled foreign company (CFC) and foreign investment fund (FIF) disclosures are due at the same date as the relevant income tax return. Taxpayers that were unable to complete the CFC or FIF disclosures on time for the 2019 income year due to COVID-19 now have until 31 May 2020 to complete this. Inland Revenue will not impose penalties provided that the income tax return and disclosure is filed by 31 May 2020.
Taxpayers who require an extension for filing other international disclosures (i.e. Common Reporting Standard, FATCA), need to advise Inland Revenue as soon as possible.
Tax residency implications
Company residence and permanent establishment
Under the current tax residency rules a company is considered a New Zealand tax resident if, among other factors, director control is fully or partially exercised in New Zealand. Inland Revenue has issued a public statement advising that companies will not become New Zealand tax resident if the directors are stranded in New Zealand due to COVID-19 travel restrictions. The rules look at how a company is managed in reality, therefore the fact that the directors are stranded in New Zealand will not change where the real business of a company takes place.
Non-resident companies will not have a permanent establishment in New Zealand if their employees are confined or stranded in New Zealand due to COVID-19 because a permanent establishment does not arise after only a short period of time. For a permanent establishment to exist, the company’s business must be undertaken through a fixed place which is not of a purely temporary nature.
Individual tax residence
An individual that is stranded in New Zealand due to the travel restrictions imposed from COVID-19 may have an extended stay despite their intentions to leave. Under the current tax residency rules, the individual may become New Zealand tax resident if they are personally present in New Zealand for a specific number of days. Inland Revenue advises that if the individual leaves within a reasonable time after their travel is no longer restricted, the extra days of stay will be disregarded.
Working from home allowances
Inland Revenue have issued two determinations about allowances and reimbursements paid to employees while they are working from home due to COVID-19. The determinations are not intended to suggest that employers must make such payments to employees.
Determination EE001: Payments to employees for use of mobile phone and internet costs while working from home
The Commissioner issued Determination EE001 in December 2019 to provide guidance for employers reimbursing their employees for mobile usage plans and tools for employment. The de minimis rule treats a payment to an employee of up to $5 per week, no more than $265 per year, as exempt income of the employee. If the employer decides to reimbursement amounts greater than the $5 weekly threshold, they must provide evidence of the costs and that it is used for the employee’s job.
Determination EE002: Payments to employees for working from home during COVID-19
Determination EE002 was released as a temporary response to COVID-19 and applies to payments made for the period from 17 March 2020 to 17 September 2020. This Determination applies to working from home costs not already covered by Determination EE001.
Under this Determination, an employer can make a tax-free payment to an employee of up to $15 per week without having to calculate actual expenses. This can be general expenditure such as additional heating costs incurred by the employee when working from home. This threshold can apply in addition with Determination EE001. This means that an employer can make an additional tax-free payment of $20 per week for total working from home expenses, where $15 is treated as exempt income under Determination EE002 and $5 is treated as exempt income per the de minimis rule in Determination EE001.
An employer may also reimburse employees a tax-free payment of up to $400 for furniture and equipment costs. This is considered the ‘safe harbour’ option and employers will not have to provide evidence of the costs incurred. Any amounts exceeding $400 may be reimbursed tax-free dependent on the extent to which the furniture and equipment is used by the employees for their employment. Note that the employer cannot claim GST on these payments as the assets belong to the employees.
What’s in the pipeline?
Changes to the tax loss continuity rules
The Government has acknowledged that some companies will be looking to raise capital which may result in a change to the existing shareholder structure. The current shareholder loss continuity rules do not allow a company to retain its tax losses if there is more than a 51% change in ownership. In response to this, the Government has proposed a change to the tax loss continuity rules by introducing a ‘same or similar business’ test.
The test allows a business to carry forward tax losses even if there is a large change in ownership. To meet the test the business must continue in the same or similar way it did before ownership changed. The test is modelled on Australia’s rules.
The Government intends to pass legislation before the end of March 2021, and for it to apply to the 2021 and later income years. Further details on the proposed changes will be released in the second half of 2020.
Discretion and greater flexibility to modify statutory tax deadlines
Inland Revenue will be given greater flexibility to modify timeframes or procedural requirements for taxpayers who are impacted by COVID-19. This proposal is in addition to other specific flexible arrangements already announced.
An amendment will introduce a discretionary power into the Tax Administration Act 1994 that allows Inland Revenue to provide an extension to due dates and timeframes, or to modify procedural requirements set out in the Revenue Acts. For example, this could include extending deadlines for filing tax returns and paying provisional and terminal tax.
At this stage the power will be time-limited for a period of 18 months and will apply to businesses affected by COVID-19.