Tax changes in COVID-19 Economic Response Package now enacted
Last updated: 12.30pm on Thursday 26 March 2020
The impact of costs incurred addressing COVID-19 risks, and the downturn in business for many sectors of the economy, has seen Parliament enact several business cashflow and tax measures. On 25 March 2020 the COVID-19 Response (Taxation and Social Assistance Urgent Measures) Bill was enacted. The measures include:
Reintroduction of depreciation on non-residential buildings: This will allow owners of buildings that are not residential buildings (i.e. such as commercial and industrial buildings, including hotels and motels) claim tax depreciation deductions to immediately reduce their provisional tax payments for the 2020-21 income year. This is a permanent change.
Immediate deductions for more low value assets: Taxpayers will be able to immediately deduct the full cost of more low-value assets in the year of purchase. The threshold has been increased from assets that cost less than $500 to assets that cost up to $5,000. This will be a temporary increase for assets purchased in the 12 months from 17 March 2020. The threshold will be permanently increased from the $500 threshold to $1,000 for assets purchased from 17 March 2021.
Fewer small businesses having to pay provisional tax: The threshold for having to pay provisional tax will increase from $2,500 to $5,000 from the 2020-21 income year. This will allow more small taxpayers to delay paying their taxes and is a permanent change.
Writing off interest on late payment of tax: Inland Revenue has been given the power to waive interest on late tax payments for taxpayers who have had their ability to pay their tax on time significantly adversely affected by the COVID-19 outbreak. The relief will apply to interest on all tax payments (including provisional, PAYE, and GST) accrued after 14 February 2020 and will apply for an initial two year period from the date of enactment.
Accelerating refundability of research and development tax credits: The new R&D tax credit rules had only limited refundability rules for the 2019-20 income year. The broader rules that were to have applied from the 2020-21 income year have been brought forward to apply from the 2019-20 income year to allow businesses to fully utilise R&D tax credits as soon as possible.
Broad information sharing powers: Inland Revenue will be allowed to share information about a person or entity with government departments and public authorities for the purpose of enabling the agency to provide or fulfil any duty or obligation in relation to the person or entity in connection with COVID-19-related assistance.
Social assistance measures: The Bill also includes a number of measures targeted at individuals, including the removal of the work hours eligibility requirement from the in-work tax credit, and extending Working for Families tax credit entitlement for emergency benefit recipients to people on a temporary visa.
The information-sharing power will need to be carefully considered once the extent of its application becomes clear, as the power extends to enabling government agencies (including the New Zealand Police) to carry out audits, reviews and other enforcement functions. That being said, the other cashflow and tax measures are welcome and should be factored into your business planning. In addition, you should consider provisional tax liabilities generally, and seek other tax relief from Inland Revenue where necessary.
Only pay the tax you expect
As soon as the impact of COVID-19 on your business can be forecast, you should consider estimating or re-estimating your current provisional tax liability. Reducing the payment of provisional tax will help those adversely affected by the economic downturn to alleviate the reduction in cash-flows. For those who are experiencing an upswing in sales, such as supermarkets and the long-life food industry, it will be important to factor higher profits into their provisional tax liability.
In calculating provisional tax liabilities, extraordinary COVID-19 expenses should be considered. That will include the cost of enabling employees to work from home, and the appropriate treatment of any redundancy payments.
Seek tax relief if you need it
Those worst affected by a weakening economy may need to seek tax relief from Inland Revenue. Several support packages have been announced by Inland Revenue , including:
- early refunds of provisional tax that has been overpaid;
- instalment arrangements to manage the payment of outstanding tax;
- extensions of time to file income tax returns; and
- tailored tax codes for individuals with tax losses.
What next? Tax in a negative interest rate economy
A more fundamental response from the government will be necessary should we enter the uncharted territory of negative interest rates. With the Official Cash Rate down to 0.25 per cent, the prospect of negative interest rates may be a “worst case” scenario for the banking sector but is a monetary policy tool that could be used to stimulate the economy.
Such a fundamental move would have widespread ramifications, not the least determining whether the New Zealand tax system would respond appropriately. The rules governing tax deductions should respond to banks crediting interest to borrowers, just as they should to payments made to store money. The more complex issues will arise in applying withholding tax rules to amounts not necessarily in the nature of interest, and to intra-group transfer pricing arrangements applying arm’s length interest rates.
If we can assist you in any way to manage your tax planning, or deal with Inland Revenue, please contact one of our tax experts.