This article aims to assist with understanding how the COVID-19 Government Wage Subsidy should be returned and treated for tax purposes in the hands of an employer.
An employer could be a company, partnership, sole trader, registered charity, or non-government organisation (NGO). For a full list of eligible employers, please visit the Ministry of Social Development website.
The employer will apply for the COVID-19 Government Wage Subsidy (or Wage Subsidy Extension) on behalf of all the employees in their business and pass the subsidy through to them as part of their ordinary wages.
If you require information on your obligations under the Wage Subsidy scheme, or what to pay your employees, please visit out dedicated BDO Wage Subsidy FAQ page.
Inland Revenue have confirmed the following tax treatment for the wage subsidy (and wage subsidy extension) for employers.
Income Tax – Employer Level
- The wage subsidy is exempt income under section CX47 of the Income Tax Act 2007.
- The employer is not entitled to a deduction for wages paid out of the subsidy under section DF 1 (2) of the Income Tax Act 2007.
- Any wages paid over and above the value of the wage subsidy are deductible as normal (I.e. the amount funded by the employer)
ACC (Accident Compensation Corporation)
- Wages paid (regardless of whether they are from the wage subsidy or funded by the employer) will still be liable for ACC under the ACC Act 2001.
- This includes wages paid to employees, working partners in partnerships, and working shareholders in companies.
GST (Goods and Services Tax)
The wage subsidy received by an employer is not liable for GST under the Goods and Services Tax Act 1985.
Income Tax – Employee Level
- The wage subsidy is subject to tax in the hands of the ultimate recipient (being the employee).
- For PAYE employees, the tax will have been deducted and paid to Inland Revenue by the employer, and the employee will have been paid their net wage.
- For non-PAYE employees, the individual will receive their gross wage/salary and is required to pay the tax on this themselves.
- Shareholder-employees - the wage subsidy will be declared as a shareholder salary at year end which they will be required to pay tax on. Additional shareholder salaries can be paid, but the wage subsidy must be declared as a minimum.
- Working Partners – the wage subsidy will be allocated as a partnership allocation which they will be required to pay tax on. Additional allocations of profits (losses) can be made, but the wage subsidy must be declared as a minimum.
- The employer should pass the wage subsidy through to employees (including shareholder-employees and working partners) in their normal pay cycles. This usually results in the wage subsidy being spread and allocated over a 12-week period. This may result in a portion being accounted for in the 2020 financial year, and the balance in the 2021 financial year.
- As with self-employed persons, returning this amount as a lump sum may result in unintended consequences with Workings for Families Tax Credits and Provisional Tax Obligations (among others), so it is advised to return this over the course of the 12-week period when the wages would normally be paid.
Case Study - Perfect Pets Limited (PPL)
PPL applied for and received the COVID-19 Wage Subsidy for its 6 staff members:
- Three full-time PAYE staff members (working >20 hours per week)
- Two part-time PAYE staff members (working <20 hours per week)
- Stacey – a full-time shareholder-employee (working >20 hours per week)
For the purposes of this article PPL has met the other required eligibility criteria to receive the COVID-19 Wage Subsidy.
On 27th March 2020 PPL received $36,518.40
- Four full-time subsidies - $7,029.60 x 4 = $28,118.40
- Two part-time subsidies - $4,200 x 2 = $8,400
Please see a link to our BDO Wage Subsidy Calculator.
PPL wants to know what information their BDO advisor will need to prepare their financial reports and tax return.
- PPL should advise their accountant what day they applied for and received the wage subsidy. As PPL received the subsidy on 27th March 2020, they will need to return a portion of the wage subsidy for the year ended 31 March 2020. The remainder of the subsidy will be returned for the year ended 31 March 2021.
- PPL should advise the amount they received for the subsidy, what employees they claimed it for, and that they were eligible to receive it.
- PPL should advise whether they met their obligations to their employees for the duration they received the subsidy.
- PPL should confirm that they did not include the subsidy in their GST returns. If they did include the wage subsidy in a return by mistake, their BDO advisor will be able to assist in correcting this with Inland Revenue.
PPL will not have any income tax to pay in respect of the wage subsidy. This is because the receipt of the wage subsidy is not subject to income tax. PPL is also aware the wages paid from the subsidy will not be allowed as a deduction.
PPL deducted the appropriate PAYE, Kiwisaver etc. from their 3 full-time and 2-part-time employees’ wages. Provided the tax rates their employees provided was correct, they will not have any further taxes to pay in respect of these wages.
Stacey will have tax to pay on the shareholder salary she is allocated at year end. This will include the portion of the wage subsidy that relates to the 2020 financial year. Stacey decides to contact her BDO adviser early to discuss what her tax will be and what payment options are available if she cannot pay her taxes on time.