More than wage subsidies for small and medium businesses… Will your industry be a winner in the new Budget's $50,000,000,000 allocation?

The 2020 Budget includes the following key initiatives:

• A total budget allocation of NZ$50,000,000,000 will support the economy through investment in employment, training and infrastructure. So far, $14,000,000,000 has been committed and spent, with a further $16,000,000,000 to be allocated to these initiatives to support jobs.
• The wage subsidy scheme will be extended by another eight weeks to provide more targeted support.
• A NZ$500,000,000 short-term bridging loan scheme aims to encourage businesses to undertake further research and development.

What do these initiatives mean for New Zealand's small and medium businesses currently facing a crisis?

{ad}

Wage subsidy: extended, but with stricter eligibility criteria

The Budget allocates another NZ$3,200,000,000 to extend the current 12-week wage subsidy scheme by eight weeks. Employers can apply for the wage subsidy extension for their employees only after their 12-week subsidy has ended. Applications will therefore open on 10 June 2020. The extended wage subsidy scheme largely retains the requirements and application process of the initial 12 weeks:

• Employers will receive a lump-sum payment covering 8 weeks at the same weekly rates as the original wage subsidy.
• Employers must use the subsidy to pay employees' wages; retain employees throughout the subsidy period; make their best efforts to pay employees at least 80% of their normal wages; and take active steps to mitigate the effects of COVID-19 on their business.

However, the additional wage subsidy comes with substantially stricter eligibility criteria.

• Businesses must now demonstrate losses of 50% in the 30 days before applying for the new wage subsidy, compared with the closest corresponding period in the previous year, rather than the previous threshold of 30%.
• Evidence of losses must be provided, whereas previously a forecast decline in revenue was sufficient.

Businesses wishing to apply should therefore consult a tax specialist to help determine whether they qualify and how to provide the relevant evidence.

 

$150,000,000 in loans to encourage business research and development

Alongside continued strong investment in science and innovation from previous years, the Budget mentions a NZ$150,000,000 short-term bridging loan scheme designed to encourage further business research and development. Complementing the research and development tax credit scheme taking effect in 2020, it will help businesses currently short of cash continue their research and development projects. More details about the loans may be announced in the coming weeks.

Other measures: reducing business losses and improving cash flow

Although not mentioned in this Budget, two other government measures announced in recent weeks also deserve attention. Both will help improve business cash flow to some extent.

Loss carry-backs

As discussed previously (see our 15 April article, “How can business losses generate tax refunds? Does tax continuity depend on shareholding proportions?

A tax specialist's immediate analysis of $3,100,000,000 in tax relief”), the Government has established a new loss carry-back scheme. It allows businesses to carry losses incurred in 2021 or 2020 back to the preceding year, 2020 or 2019, to obtain refunds of tax previously paid. Refunds have already begun.

Changes to use-of-money interest

From 8 May 2020, Inland Revenue changed the use-of-money interest rates applied to underpaid and overpaid tax:

• Underpaid tax: the interest rate charged has fallen from 35% to 7.00%;
• Overpaid tax: the interest rate paid has fallen from 81% to 0.00%.

Inland Revenue believes this change will help businesses retain more cash.

Government debt: will taxes rise in future?

However, one aspect of yesterday's Budget could create uncertainty for businesses' future development. The Finance Minister noted that government debt is expected to peak at 53.6% of GDP. He said that, after years of fiscal restraint, New Zealand is now in a position to make substantial capital investment, taking debt to its highest level since the mid-1990s.

This nevertheless raises the question of how government debt will be repaid. Unfortunately, the Government gave no indication of whether New Zealand will increase taxes in future. Although accurate forecasting is difficult in the current circumstances, reducing uncertainty as much as possible would greatly help businesses with their planning.

 

Overall, yesterday's Budget shows the Labour Government's efforts to protect private-sector jobs during the crisis while also increasing funding for the public sector. The Budget covers a wide range of areas, with a further NZ$20,000,000,000 still to be allocated. So, based on what has been announced, which industries have emerged as the favoured winners?

 

Film

Economists have long suggested that the film industry could play a major role in reviving New Zealand's economy after the pandemic. As expected, this Budget shows that the industry remains in favour with the Government, receiving $140,000,000 in film production subsidies.

 

Education

Early childhood education is the biggest winner in the NZ$1,600,000,000 education and training package, with early childhood teachers expected to receive pay rises. A substantial share of funding will also go towards tertiary education and free vocational training courses.

 

Health

With the global public health crisis continuing, health is a natural winner in the Government's Budget. Hard-hit district health boards will receive NZ$3,900,000,000, a significant increase.

 

Infrastructure and transport

Transport investment in New Zealand is mainly funded by fuel taxes and does not usually receive large allocations in the Government's Budget. In any economic crisis, however, increased infrastructure investment has always been a tried-and-tested government response. As expected, this Budget allocates NZ$1,200,000,000 to rail, including $421,000,000 for new wagons and locomotives. A further NZ$400,000,000 will fund upgrades and replacement of the existing Interislander ferries.

 

Construction

A commitment to build 8000 new public homes means the Government has doubled its investment in this area. Plans to build 1117 homes this financial year have been widely welcomed by the social services sector. Housing Minister Megan Woods's main concern is how to get the construction sector to accelerate its work.

 

Ethnic minorities

Perhaps this Budget will escape the criticisms from Māori leaders seen in previous years? It allocates NZ$900,000,000 to Māori community development, education, employment and health, alongside $195,000,000 for Pacific communities.

 

Corrections

The Government has set a target of reducing the prison population by 30% over 15 years and continues to invest heavily in achieving it. The corrections system will receive $110,400,000 to “address operating costs and inflationary pressures” and train staff. Around $75,000,000 of this will go towards infrastructure improvements.

 

Hospitality and tourism

The Budget announces NZ$400,000,000 to ease tourism's current difficulties, describing this as an “initial investment”. However, no details have yet been released on how the funding will be used. Tourism Minister Kelvin Davis believes it will help protect businesses of “national significance”, such as whale watching in Kaikōura. The hospitality association, however, believes the Government has offered the industry little meaningful support beyond extending the wage subsidy.