The Government announced last week further assistance for businesses impacted by COVID-19

The legislation was passed to bring into law the tax changes announced in mid-April as well as the Small Business cashflow loan scheme.

Small Business cashflow Loan scheme

The key features of the loan scheme are as follows:

A 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 same as the wage subsidy scheme criteria 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 5 years, with repayments not due in the first 2 years.  No interest is charged if the loan is repaid within the first year.  A 3% interest rate applies otherwise.

Inland Revenue will administer and audit the scheme, with applications open from 12 May 2020. The Act passed on 30 April 2020 contains specific provisions relating to the administration of the scheme.  A decision to grant or decline a loan will not be disputable and information can be shared with the Ministry of Social Development (MSD) (the administrators of the wage subsidy) to administer the scheme.

GST and other tax payment plans

If you have been impacted by COVID-19 such that you are unable to pay your GST, provisional tax or other tax by the due date, please get in touch with us to assist with arranging a payment plan with the IRD.  It is important to get these plans in place before any payments are missed if the IRD are to remit any use of money interest and penalties.  March 2020 GST and Provisional tax are both due on 7 May 2020, so if you would like to review your payment options in relation to these taxes, please do not hesitate to contact us.

Loss carry back

Those with losses will be entitled to a refund of prior year tax paid.  By carrying back a loss, the taxpayer will not be able to use that loss to offset any future tax. The loss carry back can be based on filed returns or estimates.  If an estimate of the loss is made, use of money interest will apply from the first provisional tax instalment for any shortfalls in that estimate year.  The safe harbour rules for using the standard uplift basis for calculating provisional tax will not protect taxpayers from interest.

It is likely some businesses will have significant 2021 year tax losses and small 2020 year profits or losses.  Unfortunately, the rules do not allow them to access a 2019 refund.

If the profit year return has not been filed, an estimated loss can be carried back by estimating provisional tax and having that refunded.  A provisional tax estimate can be made until the return is filed or the return due date, whichever is earlier.

For closely-held companies which pay profits to shareholder-employees, the expectation is that 2020 salaries can be adjusted to account for 2021 losses. Shareholder-employees will also be able to re-estimate provisional tax until their return is filed.  However, companies will not receive FBT or dividend relief if shareholders have overdrawn current accounts as a result of receiving a lower than anticipated salary.

Using the regime is not entirely without risk especially, if as is likely to be most useful, estimates of losses are used to request refunds.  If the estimate is excessive, use of money interest applies. This risk may be managed by making a number of estimates through the 2021 year as the position becomes clearer.

The complexities of the provisional tax payment rules will also need to be considered so that future year tax underpayments do not attract interest.

Finally, as these rules are brand new and can be complex, particularly where there are multiple taxpayers involved, care needs to be taken.  This is not a case of claim now and deal with the consequences later.

Taxpayers that elect to carry-back their tax losses can do so by adopting the tax position and seeking a refund of any provisional tax paid.  If a tax return for the profit year has already been filed, then the taxpayer will need to request a reassessment to obtain the refund.

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