Article:

COVID-19 Tax Response Act 2020

26 March 2020

Acknowledgement

This note is essentially a bare-bones version of the commentary on the Bill issued by Inland Revenue.  We have edited and condensed the commentary to make it more accessible while (hopefully) still including all of the necessary detail.


Overview of the Act

The COVID-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020 was passed under urgency by Parliament and received the Royal Assent yesterday (25/03/20). 


 

The Act introduces taxation and social assistance measures to alleviate the economic impacts of the COVID-19 outbreak. The amendments fall under three main categories:

Income tax

The income tax measures include:

  • restoring depreciation deductions for non-residential buildings;

  • increasing the low-value asset write-off threshold;

  • increasing the provisional tax threshold; and

  • bringing forward the application date for the broader refundability rules for R&D tax credits.

 

Tax administration

The tax administration measures include:

  • enabling Inland Revenue to remit use of money interest for taxpayers affected by COVID-19; and

  • allowing Inland Revenue to share information with other Government agencies to assist those agencies in their response to COVID-19.

 

Social assistance

The social assistance measures include:

  • removing the hours test eligibility requirement for the in-work tax credit;

  • ensuring GST does not apply to payments of the COVID-19 wage subsidy and leave payments;

  • reducing the winter energy payment rates to their current levels from 2021 after a temporary increase in 2020; and

  • allowing people on a temporary visa to qualify for Working for Families if they are receiving an emergency benefit.

 

More detail is provided in the Appendices below

 

Appendix 1 - Income Tax

 

Depreciation on non-residential buildings

Summary

Depreciation for buildings in the tax base, other than buildings primarily used for residential accommodation, has been restored.
 

Application date

The amendment applies for the 2020–21 and subsequent income years.
 

Key features

A deduction for depreciation of buildings other than residential buildings is allowed from the 2020–21 income year. It applies to: buildings owned at the beginning of that income year; and to newly acquired buildings; and to capital improvements made to existing buildings.

The depreciation rate is 2% declining value or 1.5% straight line. This is a permanent measure.
 

Detailed analysis

Opening tax book value

For buildings owned in the 2010–11 income year, the tax book value for the beginning of the 2020–21 income year is:

  • the adjusted tax book value at the end of the 2010–11 income year, less fit-out deductions taken under the section DB 65 transitional rule if applicable; plus

  • non-deductible capital expenditure incurred with respect to the building from the end of the 2010–11 income year to the start of the 2020–21 income year.

For buildings acquired after the end of the 2010–11 income year, the opening tax book value for the 2020–21 income year is:

  • the cost of the building; plus

  • non-deductible capital expenditure incurred with respect to the building from the time it was acquired until the beginning of the 2020–21 income year.

Straight line depreciation

If a taxpayer elects to use the straight line method, the building’s cost for the purpose of calculating the depreciation deduction would be the opening tax book value for the 2020–21 income year and not the original cost (if different).
 

Depreciation recovery

If a building is sold, its depreciation recovery income would be calculated taking into account depreciation deductions taken before 2011–12 (if any) and depreciation deductions taken from 2020–21. The cost base would also reduce by the amount of deductions taken under the section DB 65 transitional rule.
 

Non-residential buildings

A non-residential building is any building that is not a residential building.

A residential building is:

  • a dwelling as defined in Section YA 1; and

  • a building in which accommodation is ordinarily provided for periods of less than 28 days at a time if the building, together with other buildings on the same land, has less than four units intended for separate occupation.

The “dwelling” definition encompasses owner-occupied houses and apartments, and houses and apartments subject to residential tenancies.

The additional category including some buildings accommodating short-term stays is to ensure there is certainty that the definition of “residential building” includes buildings such as a bach that the owner uses but also rents out on a short-term basis, and also buildings used exclusively for some short-term accommodation provided by owners such as Airbnb properties. This is to make quite clear that such buildings remain non-depreciable. The less-than four units provision is meant to exclude larger commercial operations such as motels from being treated as a residential building.
 

Repeal of the 2010 transitional rule

As a result of reinstating depreciation on non-residential buildings, the transitional building fit-out rule introduced as part of the 2010 reforms is no longer be required. Accordingly, section DB 65 would be repealed, and the tax book value of the building adjusted for past DB 65 deductions.
 

Special depreciation rate

The ability to receive a special depreciation rate from the Commissioner is restored for non-residential buildings.

 

Increase in the provisional tax threshold
 

Summary

The residual income tax threshold for being required to pay provisional tax has permanently increased from $2,500 to $5,000.
 

Application date

The amendment applies for the 2020–21 and subsequent income years.

 

Increase in the low-value asset write-off threshold
 

Summary

The low-value asset write-off threshold is temporarily raised from $500 to $5,000, before decreasing to $1,000 on a permanent basis. This allows taxpayers to immediately deduct expenditure on assets that cost up to $5,000 (and subsequently $1,000) rather than depreciating them over the life of the asset.

Application date
 

The $5,000 threshold applies for property purchased on or after 17 March 2020 but before 17 March 2021.

The $1,000 threshold will then apply for property purchased on or after 17 March 2021.

 

Research and development tax credits - broader access to refunds
 

Summary

The application date for the broader refundability rules for R&D tax credits has been brought forward to apply from the first year of the R&D Tax Incentive scheme (they previously applied from the 2021 income year).

Application date

The amendment applies from the 2019–20 income year.
 

Key features

Previously, limited refundability rules applied in the 2019–20 income year (year one rules), which only allowed businesses that met certain corporate eligibility and R&D wage intensity criteria to access refundable credits. A $255,000 cap applied to limit the total amount of credits that could be refunded.

The broader refundability rules do not include the corporate eligibility and R&D wage intensity criteria, and replace the $255,000 cap with a cap based on labour-related taxes. These changes enable more businesses to access R&D tax credit refunds, and also enable more of these businesses to access greater amounts of refundable credits.

The broader refundability rules apply by default to all claimants in the 2019–20 income year, but businesses have the option of using the year one limited refundability rules if they prefer. A business will be asked to confirm which set of refundability rules they intend to apply to its claim when filing an R&D supplementary return.

All businesses will have to use the broader refundability rules from the 2020–21 income year onwards.
 

Detailed analysis
 

The broader refundability rules (default option)

The broader refundability rules apply from the 2019–20 income year, and apply by default unless a business chooses to apply the limited refundability rules in section LZ 14 (section LA 5 (4B), (5B), (5C), and (5D)).

A loss-making business can be eligible for R&D tax credit refunds provided it is eligible for the credit more generally. It can obtain R&D tax credit refunds up to a labour-related tax cap. The cap is made up of any labour-related taxes (PAYE, ESCT, and FBT):

  • paid by the business; and

  • paid by companies the business is controlled by or which sit within the same wholly-owned group, if these companies have allocated amounts to the business for the purposes of the cap.

No cap applies to refundable R&D tax credits paid to levy bodies, or derived from eligible expenditure on approved research providers.

The “transitional 2020–21 amount” portion of the refundability cap formula (see section 101 of the Taxation (KiwiSaver, Student Loans and Remedial Matters) Act 2020) is deleted. The “transitional 2020–21 amount” is not needed because businesses would be able to apply the year two broader refundability rules if they provide a better outcome for them in the 2019–20 income year.
 

The limited refundability rules

New section LZ 14 sets out the limited refundability rules, which businesses can choose to apply instead of the broader refundability rules if they prefer. A business can obtain R&D tax credit refunds under the limited refundability rules, provided it is a company and:

  • is in a tax loss position, or has insufficient income tax liability to utilise all of its R&D tax credits in the 2019–20 income year;

  • satisfies the R&D tax loss cash-out corporate eligibility and wage intensity criteria in sections MX 2 and MX 3;

  • does not derive exempt income, and is not associated with a person who derives exempt income;

  • is not a listed company, and is not associated with a listed company; and

  • does not have an outstanding tax liability.

Only the first $255,000 of the business’s R&D tax credits is refundable, which is the equivalent of $1.7 million of eligible expenditure. Any remaining R&D tax credits may be carried forward to the 2020–21 income year if the shareholder continuity requirements in section LY 8 are met.
 

Choosing between the year one and year two refundability rules

Businesses have the option of applying the existing year one limited refundability rules in the 2019–20 income year if they prefer (proposed new section LZ 14). Businesses may choose to use the limited refundability rules or the broader refundability rules in the
2019–20 income year, but they cannot use both. Only the broader refundability rules would be available from the 2020–21 income year.

 

Appendix 2 - Tax Administration

 

Use of money interest remission

 

Summary

The amendment allows 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.

This would include both when a taxpayer is physically unable to make a tax payment on time and when a taxpayer is financially unable to make a tax payment on time because of the economic nature of the COVID-19 outbreak.

This power to remit interest only applies to interest that has accrued on tax payments due on or after 14 February 2020 (so it has limited retrospectivity). The taxpayer must ask for the interest to be remitted and the Commissioner must be satisfied that the taxpayer has asked for the relief as soon as practicable and made the payment of tax as soon as practicable.

Interest will not be remitted until the core tax debt has been paid.

Inland Revenue is developing guidance on when a taxpayer will be considered eligible for interest to be remitted. Preliminary guidance is available here.

 

Application date

The amendment came into force on 25 March 2020.

This power to remit interest related to COVID-19 expires two years after the Royal Assent date (so should be 26 March 2022 unless extended by an Order in Council.

 

Information sharing

 

Summary

This measure allows Inland Revenue to share taxpayer information with other agencies (Government departments, the New Zealand Police, ACC, and Kāinga Ora) to assist the efficient and effective delivery of the Government’s COVID-19 response.

Shared information will not be available for use in administering other assistance not related to COVID-19.
 

Application date

The proposed measure applies from 17 March 2020 (being the date of announcement of the change).

It will for a period of two years only unless extended by an Order in Council. This would allow the Government to continue sharing information, if required, in response to COVID-19 after the two-year period.

 

Appendix 3 - Social Assistance

 

Removal of hours test from the In-Work Tax Credit

 

Summary

The In-Work Tax Credit is an income-tested cash payment to working families with children of $3,770 per year (plus an additional $780 per child for 4th and subsequent children). This amendment removes the requirement for recipient families to normally be working at least 20 hours per week as a sole parent or a combined 30 hours per week as a couple.

The remaining eligibility criteria for the In-Work Tax Credit will remain unchanged: recipient families must still be deriving income and cannot be receiving an income-tested benefit or student allowances.
 

Application date

The change applies from 1 July 2020.

 

Winter energy payment

 

Summary

As part of Phase One of the COVID-19 Recovery Package, the annual rates of winter energy payments for 2020 were doubled to $900 for single people with no dependent children, and $1,400 for couples or single people with dependent children.

This amendment provides for the reduction of the rates back to $450 for single people with no dependent children and $700 for couples or single people with dependent children.
 

Application date

The amendment applies from 1 May 2021.

 

Working for Families tax credits entitlement for emergency benefit recipients

 

Summary

The amendment allows people on a temporary visa who wouldn’t otherwise meet the Working for Families (WFF) residency criteria, to qualify for WFF, if the Ministry of Social Development (MSD) has granted them an emergency benefit. This would ensure that people on a temporary visa who are granted an emergency benefit would qualify for the same WFF components as other beneficiaries.
 

Application date

The amendment applies from 1 April 2020.

 

GST on COVID-19 related social assistance payments

 

Summary

The amendment ensures that COVID-19 Leave Payment and the COVID-19 Wage Subsidy (the payments) which were paid between 17 March 2020 and 23 March 2020 are not subject to GST.

The amendment is necessary because the Goods and Services Tax (Grants and Subsidies) Amendment Order 2020 (the 2020 Order) came into force on 24 March 2020. This Order added the payments to the schedule of non-taxable grants and subsidies in the Goods and Services Tax (Grants and Subsidies) Order 1992, however, it did not have retrospective effect. This means that the payments are only non-taxable from 24 March 2020, which was not the intent.


Application date

The amendment came into force on 25 March 2020 and applies retrospectively from 17 March 2020.


Information included in this insight was last updated on 26.03.2020

Please contact your local adviser for specific advice.