Auckland, April 5, 2020
The Government of New Zealand passed the COVID-19 Response: Taxation and Social Assistance Urgent Measures Bill to deal with the economic turmoil created by COVID-19.
This Bill provides immediate response and relief to struggling businesses and individuals.
The targeted measures aimed at providing relief to those that have been economically affected by the COVID-19 outbreak.
Bringing back the deprecation
Depreciation on non-residential buildings is being brought back.
The depreciation on building was disallowed from 2011.
The depreciation rate would be 2% declining value or 1.5% straight line, and the application date is from year 2020-2021.
The ability to receive a special depreciation rate from the Commissioner would be restored for non-residential buildings.
It only includes non-residential buildings.
A non-residential building is any building that is not a residential building.
Residential building has already been defined in the Act (Section YA1).
The definition has been extended to include Bach, and short-term accommodation such as Air BNZ to ensure that they are included in the residential building. But it excludes the larger commercial operations such as motels from being treated as a residential building.
This measure will help lot of businesses such as property investors and large companies.
Since small businesses generally do not own commercial buildings and hence may not receive the direct benefit of this change.
There may be some indirect benefits such as they can negotiate lower rent on their building lease.
Provisional Tax Threshold changing to $5000
This measure would permanently increase the residual income tax threshold for being required to pay provisional tax from $2500 to $5000.
As a result, provisional tax payments throughout the year will no longer be required.
This would assist with the cashflow. The Amendment came into effect on April 1, 2020.
For example, if the tax liability for year 2019-2020 was $10,000, but for year 2020-21, is estimated to be half only $5000, then no tax payment is required until February 7, 2022.
This measure will assist many small income earners.
For example, if your taxable income is about $34,000(sales less expenses) then, your tax Bill will be deferred till February 2020.
This measure will also help individuals who work full time and pay tax on rental income. They will also be able to defer their tax Bill until such time.
It is evident that the intended benefit is for only very small business owner.
The government expects that the proposed measure would remove around 95,000 taxpayers from the provisional tax regime.
Asset Write off of $5000
The current tax rules allow assets worth up to $500 to be allowed as tax deduction, and the assets over this amount are capitalized and depreciated over its useful life.
The new rules would temporarily increase the low-value asset write-off threshold from $500 to $5000 in the short term before decreasing this threshold to $1000 on a permanent basis.
It means that if you purchase any assets worth $5000 and below you can expense the whole amount in the same year.
The new rules apply to assets purchased on or after March 17, 2020.
Until March 17, 2021, the threshold will be $5000, then after this date the threshold will be reduced to $1000 on a permanent basis.
The intended outcome would be encouraging businesses to spend.
Changes to R&D Tax Credits
The Research & Development Tax Credit Bill was introduced earlier last year.
The main purpose of this Bill was to ensure that New Zealand business can get tax credits for eligible spend on Research and Development expenses. It includes 15% tax credit with a $120 million cap on eligible expenditure, and a minimum expenditure threshold of $50,000 per year. The Government estimated 2000-3000 can benefit for this scheme. The enactment date of which has now been brought forward. So, the application date now is 2019-20 tax year.
The enactment of the R&D Bill was in two parts Year 1 (Limited Refundability) Rules and Year 2 (Broader Refundability Rules).
To provide cash to businesses now and encourage them to continue with their R&D despite COVID-19, this proposed amendment would bring the application date of the broader year two refundability rules forward. This would enable more businesses to access refundable R&D tax credits and would provide some businesses with larger refunds than they would have obtained under the existing year one limited refundability rules.
A refundable R&D tax credits are available for eligible businesses who have core business activity in New The cap of R&D tax credit is total PAYE paid during the year.
The regime does not include charities and tax-exempt entities.
Example: In the year ended March 31, 2020, BAC Limited has eligible R&D expenditure of $1 million and hence is eligible for $150,000 of R&D tax credits.
The Company has no income tax liability to offset its R&D tax credits. During the year, $200,000 of PAYE is paid for its employees. BAC is able to receive an R&D tax credit refund of $150,000.
This change will help eligible businesses to obtain tax credits sooner.
Use of Money Interest Remission
Interest is charged when a taxpayer fails to make a payment of tax on time. The changes allow the Inland Revenue to remit interest on a late payment if the taxpayer’s ability to make the payment on time was significantly adversely affected by the COVID-19 outbreak
New rules would give the Income Tax Commissioner the ability to remit interest that has accrued on tax payments due on or after February 14, 2020.
Interest will not be remitted until core tax is paid in full.
At this stage the proposed rules apply till the next 24 months.
This change will help business to not incur additional cost if they are not able to make tax payments on time.
Extending In-work tax credits
The In-work tax credit provides further cash incentives to working people.
The current cap is 20 hours per week for a solo parent or combined 30 hours per week for a couple.
It provides cash payment to working families with children of $3770 per year (plus additional $780 per child).
From July 1, 2020, the hour test is being removed. Thus, the new rules would allow all working for family recipients that have income from employment to receive In-Work tax credits.
This will benefit families that work a fluctuating number of hours.
Saurav Wadhwa is a Chartered Accountant and a Tax Specialist. He is the Managing Director of the Auckland based firm IBBZ Accounting Limited. He can be reached on 027-5555458. Email: firstname.lastname@example.org; website: www.ibbz.co.nz