The taxing consequences of COVID-19 in New Zealand
COVID-19’s economic fallout is choking businesses’ cash flow. Here are some tax issues CAs can advise their clients on.
- Accountants are in a special position as trusted advisers to help clients through COVID-19.
- CA ANZ has worked with Inland Revenue to request no tax barriers for businesses looking to restructure.
- The main tax issue for June-July will be meeting tax obligations when cash flow is so poor.
By Hamish Barwick
The Cooper Aitken accounting firm serves rural communities of the Waikato and Coromandel regions. In April, just before New Zealand moved out of its strict Level Four lockdown, director Rory Noorland CA was working with a client in the paving industry.
Infrastructure New Zealand’s CEO Paul Blair said in a statement on 31 March that many construction companies had taken measures under Alert Level Four to cut salaries and reduce staff hours, but on 28 April, along with the rest of the construction industry, Noorland’s client was able to return to work under Alert Level Three, potentially avoiding job losses.
“They have a stream of work ahead of them but there is some uncertainty in the longer term as to what the building industry will look like,” Noorland says, adding he addressed the need to pay the 2019 terminal tax and the impact on cash flow and savings with his client.
Grappling with a client’s tax issues can be stressful at the best of times. With New Zealand’s COVID-19 lockdown leaving a string of businesses with no income, accountants are in a special position as trusted advisers to help clients through this time.
Noorland also considered the longer-term cost of not settling the tax liability. He reviewed the draft 2020 performance and made a tax calculation to determine a reduced amount of provisional tax, which was due on 7 May.
“Once we had established a less than standard uplift payment was required, we explored the options for minimising the impact of making this provisional payment of approximately NZ$55,000,” he says.
“We decided that spreading the payment out over 12 months via the finance option with Tax Traders presented the best balance of preserving cash flow on a monthly basis, while accessing cheap and flexible payment terms with financing.”
Noorland also had a long conversation with the client about the ability to scale back the operation if required in six months’ time – and the areas in which some possible costs savings could be made.
“The business is already run on a very lean basis, so it is mainly around related employee costs and matching the staffing levels to the potential workload going forward. With having a very good name and operating in the industry for a long time, the viability of the business is strong. It is just managing [the business] through any potential period of downturn.”
Tax rules about business restructure
Chartered Accountants Australia and New Zealand has worked closely with Inland Revenue over the past few months to request no tax impediments for businesses looking to restructure.
“There are a number of tax regimes that hinder debt restructuring, such as financial arrangement rules where if you have a debt forgiven, that will be treated as deemed income and underdoes the benefit of it,” explains CA ANZ New Zealand tax leader John Cuthbertson CA.
“The government has looked at this [restructuring] in terms of equity injections. It is going to bring in tax rules around business continuity. At present we just have loss carry-forward rules, but it is going to enhance that with a business continuity test. That will allow equity injection and it is for the 2020-21 income year.”
Noorland says the main tax issue for June-July will be a continued cash-flow issue of meeting tax obligations. He forecasts that some businesses won’t be able to pay provisional tax or terminal tax, such as PAYE, on time.
Tax Traders director Josh Taylor agrees many people will struggle to pay off their 2019 terminal tax in June-July. “The challenge for them there is they will have been profitable for 2019, but they are paying for it now and there is no money right now,” he says. Taylor is working with a client that cannot operate at present but has made tax payments into the tax pool for the 2020 year.
“What we’ve done for them is release the tax payments they have made into the pool back into their business,” Taylor says. “They don’t need to file those payments across to Inland Revenue until March next year, at which point they will pay the money back to the pool to reinstate their tax payments.
“In the meantime, they have that money to help keep the lights on and run the business day-to-day until it starts generating income again. We’re working with them to manage expectations around provisional tax payments to the 2021 year and funding those as we go.”
“The challenge for them there is that they will have been profitable for 2019, but they are paying for it now and there is no money right now.”
Provisional tax challenges
The second area of challenge is going to be about provisional tax for the 2020-21 years, Taylor says.
“The reason those years get lumped together is because of the temporary loss carry-back initiative introduced by the government. Due to COVID-19, there is now some uncertainty around profits in 2021.
“If the business is making a loss, should the owner be thinking about paying a reduced tax amount for 2020 or claiming some back given the loss carry-back initiative.”
GST and PAYE
The final issue is paying GST and PAYE, with businesses’ ongoing ability to meet these payments dependant on cash-flow levels in the economy.
Inland Revenue has a criteria it applies when considering remission of use of money interest (UOMI).
“Inland Revenue will be focused on your ability to pay on time and whether you are viable as a business going forward,” says Taylor. “They are unlikely to grant you remission or time to pay if it looks like your business isn’t going to be around in12months’ time. In order to do that [remission], you’re going to have to provide them with bank statements, financial projections going forward, creditors and debtors.”
Giving the right advice
Cuthbertson advises chartered accountants to be up to date on tax legislative measures and relief for businesses such as the government’s wage subsidy scheme.
Wage subsidy scheme payments were intended to cover employees’ wages for 12 weeks. If most staff employed by the business are on low wages, the payments may have been in excess.
“The employer can apply that excess to other employees but any surplus needs to be repaid to the government,” he says.
Noorland suggests exploring what other measures are available to clients that can give them certainty about tax payments. “It might be the use of tax intermediaries such as Tax Traders to lock in tax payments into the future at interest rates that are known.”
Taylor advises accountants to suggest options to clients for cash-flow funding support such as how to structure a payment plan with their suppliers.
“These are helpful for businesses because when you’re under pressure, you’re not always thinking well, so having a trusted adviser who can come in and inject some fresh ideas is useful.”
FROM THE CA LIBRARY
New Zealand Master Tax Guide 2020
Contains practical examples and concise summaries of legislation, cases and IRD rulings and statements affecting the 2019/2020 and future tax years.Download from the CA Library
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This dedicated hub is regularly updated to ensure members are equipped to navigate the serious long-term economic and business impacts from this pandemic, including the latest updates on available government packages, guides for your practice or business and support to maintain your mental health and wellbeing.Read more