COVID-19 tax proposals

The Minister of Finance today announced a business package containing proposed measures to support businesses affected by the corona virus outbreak. The tax-related measures include:

Reintroducing depreciation on commercial and industrial buildings

Depreciation deductions will be reintroduced for new and existing industrial and commercial buildings, including hotels and motels.

Interestingly, this will enable the capital cost of seismic strengthening of buildings to be depreciated and therefore claimed as a deduction.  This wasn’t possible under the Governments previous approach that saw the seismic strengthening as a non-depreciable improve, not repairs and maintenance.

The law change will allow owners of commercial and industrial buildings to start reducing their provisional tax payments for the 2020-21 income year immediately. There is no application process as the increased deduction will be available as part of normal tax filing processes.

The rate allowed willed to calculated at 2% diminishing value basis.

This change is considered to be a permanent one starting with the 2021 tax year, rather than for a period of time.

Immediate deductions for low value assets

Taxpayers are currently able to claim an immediate deduction for the purchase of assets that cost less than $500. This threshold will be further increased to allow the immediate expensing of assets that cost up to $5,000, for a year (the 2021 tax year). The threshold is being permanently increased to $1,000 (from 2022 tax year onwards). This will reduce compliance costs for businesses and encourage businesses to continue investing.

 Fewer small businesses having to pay provisional tax

The threshold for having to pay provisional tax will moved from residual income tax of $2,500 to $5,000 for the 2021 tax year.  Your 2020 residual income tax will dictate whether you meet the criteria.

This is a permanent change with the $5,000 threshold continuing indefinitely.

Writing off interest on some late payment of tax

The Commissioner of Inland Revenue will be given the power to waive interest on late tax payments for taxpayers who have had their ability to pay their tax on time significantly adversely affected by the COVID-19 outbreak. Use of Money Interest (UOMI) is routinely charged on late tax payments.

Businesses and individuals will need to show an inability to pay tax by the due date as a result of being significantly adversely impacted by COVID-19. Detail on objective tests is yet to be finalised but will be in the coming days.

The relief will apply to interest on all tax payments (including provisional, PAYE, and GST) due on or after 14 February 2020.  This scheme will continue for a period of two years.

What does this mean for me?

The above are the one branch of a number of packages that the Government has announced.  We will be covering the impact of the other packages separately.

If you want to better understand your personal situation and how these changes impact on you, contact your Campbell Tyson Advisor, or drop me a line.

Expensive Funding

When cash flow gets tight, we all look for ways to delay payments, use financing that is available, and do everything possible to ensure the business (and household) keeps on running.

Sadly, the IRD is sometimes seen as a potential financier.  In NZ we rely on self assessment, and the filing of returns is seen as something separate to the payment of the tax.  In my experience, some tax payers believe that this provides a possible avenue of funding when things get tight. 

Unfortunately, the cost of this “finance” is almost always the nail in the coffin for a struggling enterprise.  As the following graph indicates, your debt grows at a rate most likely faster than the profits you retaining the cash has created resulting in a bigger car wreck in the end.

 

 

 

 

 

From the graph you can see that sometime during the 3rd to 4th year, your debt will have doubled.  Thats expensive whatever way you look at it.

If you are getting in to difficulties with your cash flow, talk with your professional advisor about what you could be doing differently, the sooner the better.  If you are already behind with the IRD, get in touch with us and we can talk about strategies before things get out of hand.

Till next time.