Making the most of new tax measures to strengthen businesses through the pandemic

On 28 February 2020, confirmation of the first local coronavirus case drew New Zealand, previously sheltered in its corner of the South Pacific, into the COVID-19 storm. As the outbreak spread, everyone’s lives seemed to be put on pause: working from home, resting and regrouping, and waiting for the day life could restart.

During this period, the New Zealand Government introduced a package of new policies to help businesses and individuals severely affected by the pandemic. This article introduces and analyses the tax-related measures, inviting readers to explore them together and helping them find a way through the difficulties caused by the pandemic.

2,800,000,000! The first wave of measures focuses on tax relief 

On 17 March, the first tax stimulus package was announced, committing 2,800,000,000 from the government’s budget. The main measures covered the following 6 points:

• Fixed-asset depreciation for commercial property

From 1 April 2020, commercial properties, including hotels and motels, can be depreciated as fixed assets. The depreciation rate is 2%, and either the straight-line method or diminishing value method may be used, with depreciation calculated from the book value.

• Higher immediate deduction threshold for low-value assets

To encourage continued investment in production during the pandemic, the threshold for immediately deducting low-value assets was raised from NZ$500 to NZ$5000 from 17 March 2020. The threshold will subsequently fall to NZ$1000 from 16 March 2021.

For example, a business planning to buy equipment worth NZ$4600 would previously have had to record it as a fixed asset and depreciate it. The pandemic might have put that purchase on hold. To encourage businesses to proceed despite the pandemic, the government now allows the equipment’s cost to be deducted directly against income for the current tax period.

• Higher provisional tax threshold

Many people doing business in New Zealand strongly dislike provisional tax because its 3 annual payments eat into working capital. The government has therefore raised the provisional tax threshold from NZ$2500 to NZ$5000 to ease cash flow pressure on small and medium-sized businesses and individuals. 

• Discretionary remission of penalties

From 14 February 2020, taxpayers severely affected by the pandemic can apply to pay their core tax in instalments. Inland Revenue is permitted to remit interest and penalties arising when businesses cannot pay tax on time because of the pandemic. Remember that this relief must be actively applied for.

• Information sharing

Inland Revenue may exchange information with other government agencies, including Work and Income within the Ministry of Social Development, the Ministry of Health, and the Ministry of Business, Innovation and Employment, to better serve taxpayers in difficulty.

• Lower eligibility threshold for family tax credits

From 1 July 2020, the working-hours threshold for the In-work Tax Credit component of Working for Families, commonly known in Chinese as the “milk powder allowance”, will be lowered. Previously, couples raising children had to work at least 30 hours a week between them, while sole parents had to work at least 20 hours a week. Under the revised policy, anyone with income can apply for In-work Tax Credits, without a minimum working-hours requirement.

{ad}

Another 3,100,000,000 committed! A second stimulus package announced

On 15 April, the government announced a second tax stimulus package comprising 6 measures: tax loss carry-backs, relaxed shareholder continuity rules for losses, amendments to the Tax Administration Act giving Inland Revenue greater flexibility, additional business advisory support, changes to the Companies Act, and assistance for commercial tenants and landlords. This article focuses on the first 4.

• Tax loss carry-back (Tax loss carry back) relief

Previously, when a company incurred a loss in a particular year, that loss was generally carried forward to offset the following year’s profits, except in special circumstances. Now, a tax loss incurred in the following year can be offset against the previous year’s profits.

Suppose a company made a profit of NZ$600,000 in the 2020 financial year and a loss of NZ$500,000 in the 2021 financial year. The 500,000 loss can be offset against the 600,000 profit from 2020.

Under the previous policy, the 500,000 loss would have to be carried forward to 2022 and offset against profits generated in 2022. If the company also made a loss in 2022, the losses from both 2021 and 2022 would then be carried forward to 2023.

This new policy has two stages and is expected to cost the government NZ$3,100,000,000 over the next two years.

The first stage, which has already been confirmed, is temporary: taxpayers expecting a loss in the 2020 or 2021 financial year can offset that estimated loss against the previous year’s profits.

Returning to our example, the company’s NZ$500,000 loss in 2021 can be offset against its 600,000 profit in 2020. This reduces its profit for the 2020 financial year to 100,000 and its tax liability from NZ$168,000 to 28,000. Excess provisional tax previously paid for 2020 will be refunded.

Businesses do not need to wait until their 2021 financial statements are complete before estimating the loss. If they expect a loss in 2021, they can include that estimate directly in their 2020 tax return.

Note that Inland Revenue will charge interest if the estimate is wrong, although it is developing a new interest rate for this purpose.

The second stage will be a longer-term policy applying from the 2022 financial year onwards. Details of the draft will be released for public and industry consultation in the second half of this year.

• Shareholder continuity rules for losses (tax loss continuity rules) relaxed

Previously, a company could carry its losses forward to the next financial year only if it maintained at least 49% shareholder continuity from the start of the loss and throughout the loss period;

Failure to maintain 49% shareholder continuity meant losing all previously accumulated losses. This policy deterred some potential investors.

In response to the pandemic and economic crisis, the government has now announced that it will relax the shareholder continuity rules for losses.

The government expects the new legislation to pass by the end of March 2021 and apply to the 2020/2021 financial year.

Once implemented, the policy will increase the potential value of loss-making businesses and attract prospective investors. It is expected to help many small and medium-sized businesses seeking finance.

This new policy will cost the government NZ$60,000,000 a year.

For implementation, the government may draw on Australia’s “same or similar business test”.

In other words, losses could be carried forward to the following year provided the way the business operates does not change substantially before and after new shareholders provide funding.

Many details of the new rules remain unclear. The draft’s specifics will be released for public and industry consultation in the second half of this year.

• Amending tax administration legislation (Tax Administration Act）

Tax payments have fixed deadlines, as everyone knows. The government will now amend the Tax Administration Act to give Inland Revenue greater powers to extend payment deadlines or modify procedural requirements at its discretion for businesses affected by the pandemic.

• More business advisory support

The government has allocated NZ$25,000,000 to the Regional Business Partner Network to provide free business mentoring and advice.

This covers business continuity planning, finance and cash flow management, and human resources, among other areas.

Businesses needing assistance can apply for relevant advisory services, with the government covering the cost.

Using policy support to find a way through the pandemic

The government’s array of new tax measures can seem bewildering. How can taxpayers use these stimulus policies to benefit themselves or their businesses? What should they watch for when putting them into practice?

• Paying core tax in instalments

In guidance released in March this year, the government said taxpayers severely affected by COVID-19 need not worry if they could not pay tax on time on or after 14 February 2020. They could contact Inland Revenue to make arrangements when able. 

Several points deserve attention. First, Inland Revenue still expects taxpayers to file returns on time, because this business information is valuable for forecasting government revenue;

Second, taxpayers must enter into an instalment arrangement with Inland Revenue to pay their core tax. Any interest and penalties arising from instalment payments will still be charged, although Inland Revenue can remit them after the core tax has been paid;

Finally, deferring tax payments does help businesses preserve cash flow, but they should consider the consequences 12 months later. They may then face the difficulty of having to pay tax for both the 2019/2020 and 2020/2021 years at the same time.

• Changing GST filing frequency

Although it means more compliance work each month, filing GST returns monthly may allow businesses to receive refunds more regularly. Businesses can change their GST filing frequency in myIR.

Note that Inland Revenue’s system automatically applies any refund to outstanding debt.

If a business is considering changing its GST filing frequency to receive refunds sooner, but has unpaid provisional tax because of COVID-19 and has not agreed an instalment arrangement, any GST refund will automatically be offset against that debt rather than paid out.

• Writing off low-value assets and depreciating industrial or commercial buildings

This is another useful way to reduce tax. Under the stimulus package, depreciation on non-residential buildings can be claimed from the 2020/2021 year at 2% using the diminishing value method or 1.5% using the straight-line method. Low-value assets costing less than NZ$5000 bought between 17 March 2020 and 16 March 2021, or less than NZ$1000 bought afterwards, can be deducted immediately against income in the year of purchase.

• Consider tax pooling (tax pooling）

Tax pooling allows taxpayers to purchase previously unpaid or underpaid provisional tax through an IRD-approved intermediary to avoid Inland Revenue penalties and interest.

Taxpayers can also use tax finance through these intermediaries to pay provisional tax and ease cash flow pressure.

This gives taxpayers greater flexibility in paying provisional tax without worrying about penalties. In the current circumstances, businesses facing cash flow pressure could consult their accountants to determine whether tax pooling is a suitable option for their situation.

The COVID-19 pandemic has dealt a tremendous blow to the global economy, and New Zealand has not escaped. Every business and taxpayer here is like a drifting leaf caught in the whirlpool.

We hope this explanation of the new tax policies introduced during the pandemic proves helpful. Let us work together and look forward to brighter days after the storm.

 

About the authors:

Tony Su

Baicheng Chartered Accountants was established in 2009. Its founder, Tony Su, is a licensed Chartered Accountant (CA) and full member of Chartered Accountants Australia and New Zealand (CAANZ), a Fellow Certified Practising Accountant (FCPA) of CPA Australia, and an ACCA-qualified chartered certified accountant. Tony has 17 years of professional experience, with specialist knowledge and extensive expertise in taxation, tax audits, business planning and business advisory services.

 

Conor Zhang

Conor Zhang graduated from the University of Waikato with a Master of Professional Accounting. He currently works as an Assistant Accountant at Baicheng Chartered Accountants.