The Week in tax: the wage subsidy extension, capital gains tax is back on the agenda, and time to top up your KiwiSaver contributions

From last Tuesday, businesses and the self-employed can now apply for the Government's Wage Subsidy Extension.

Eligible businesses can get a lump sum payment for a further eight weeks of $585.40 per week per full time employee. The criteria for this has changed from the original wage subsidy scheme. Now a business to qualify must have had a revenue loss of at least 40% for a 30 day period in the 40 days before they apply, compared with the previous closest period last year. So, for example, you'd look at your revenue in this month, June 2020, and compare it with the revenue for June 2019.

Applications for this are open until 1st of September. And as in the case of the existing wage subsidy scheme, it will be administered by the Ministry of Social Development who will be working closely with Inland Revenue on this matter. As I understand it, what happens is the application comes in and MSD will check and then if they've got any enquiries, they'll give Inland Revenue a call.

The tax treatment of this subsidy amount remains the same as previously advised. That is, it is not subject to GST, is non assessable and non-deductible for the employer, although when the payments are made to the employees, they're taxed as regular income through PAYE.

This does lead to a rather cumbersome tax and accounting treatment and some of us are looking at this and thinking for ease of accounting and to avoid slip ups, it may be better for the employer to treat it as all taxable and deductible. The net effect is the same anyway.  We're looking at the accounting treatment of this, which can get a little awkward because of this mismatch between the wage subsidy payment being non-deductible for the employer but remaining taxable for the employees.

Speaking of ongoing government support, last Friday after I recorded last week's podcast, the Finance Minister announced that the Small Business Cashflow Scheme would now be extended until 24th of July. This has been an extremely successful initiative for small businesses. So far, $1.33 billion dollars has been lent to well over 70,000 businesses.

And as I discussed last week, it had taken the space that the Government's Business Finance Guarantee Scheme had not filled. And the comparison between lending under both schemes is quite stark. As I mentioned, the Small Business Cashflow Scheme has been accessed by approximately 70,000 businesses and they've borrowed $1.33 billion dollars.

By comparison, lending under the Business Finance Guarantee Scheme has been $86 million to just 503 businesses, according to the latest business lending numbers from the Bankers Association.

Now, it's not like the banks are not lending. In fact, according to the Bankers Association, business lending since March 26th has been quite extensive. They've lent over $10 billion dollars to over 16,000 customers, as well as the separately reducing the loan payments on another $12.5 billion for 13,000 customers. In addition, they've deferred all loan repayments on one billion dollars owed by 3,105 customers.

So, the banks have been working in the background. It's just that the Business Finance Guarantee Scheme, which was quite a headline project at the time, isn't designed to do the type of lending that businesses are looking for right now. That is short-term, immediately accessible and with an uncomplicated process.

Unfortunately, the Business Finance Guarantee Scheme ticks none of those boxes and that possibly is down to the design of it and the understandable wish of Treasury to protect the Government's risk.

As I said last week, one of the things about the benefits of the Small Business Cashflow Scheme is it deals with a matter of resourcing for small businesses. The process to borrow under the scheme is very straightforward and money is delivered quickly.

And the process small businesses go through when applying for loans to the banks, they struggle with that. They have to get a lot of material together. It costs some money to get if they bring in their accountant to assist. And there's no guarantee they'll get the funds.

So, as I said last week, I think once we've gone through everything, the Government should look very carefully at how a future scheme to help small businesses could be designed.  Maybe we want to have a look at what the Small Business Administration in America. How it guarantees loans and works together with banks on lending.

A simpler process for small businesses could be very helpful for the future growth of our country. Because it's accepted by all that, we're going to have to grow our way out of this recession if we are to get the massive amount of debt that the Government has rightly borrowed for this emergency under control again.  [Update, it appears that preliminary discussions about a permanent iteration of the Small Business Cashflow Scheme have taken place.]

Still a live public policy debate

And as part of getting the Government's debt to GDP ratio under control again, capital gains tax has popped up on the agenda again in a couple of instances this week. Firstly, James Shaw, the co-leader of the Green Party, talking to Jenée Tibshraeny raised it as something that we should be considering. Shaw's view was that a capital gains tax made more sense now,

“It was our policy when we entered parliament in 1999; it remains our policy today. The extent to which we’ll lead with that or with something else [at the election] is yet to be revealed,”

But I don't think anyone should be surprised a tax is going to be on the election agenda this year. We've had a huge shock to the economy. The Government's books have been shot to bits. And at some stage, tax will be a feature of how those books are rebuilt.

And talking of rebuilding and still on the tax side, PricewaterhouseCoopers (PWC) issued a report called Rebuild New Zealand, which set out seven planks, as it called them, to rebuild New Zealand.

One of these is about addressing tax reforms.  And what it says about that is to pick up a theme of last year’s Tax Working Group that tax reform must be considered to broaden the Government's revenue base and remove investment bias. it refers to the elephant in the room being a capital gains tax. It's probably no coincidence that Geof Nightingale, who's a partner at PWC, was also a member of the Tax Working Group.

The report goes on,

“In our view, there is now a greater need than ever to broaden New Zealand's tax base so it relies less on taxing income. So is it time to look again at a simple, broad based CGT?”

The report cites the example of the introduction of a broad-based GST over 30 years ago as a model for designing a future CGT, and goes on to say,

“The debate on CGT would be very different if New Zealanders had a better understanding of the extent to which it could actually impact them during their lives and also the trade-off that there might be an eventual trade-off between CGT and income tax.”

And this is something I think should be considered: by broadening the tax base to include capital gains tax the need to increase the top rate of income tax, for example, is minimised. There is a trade-off here and I agree with PWC we should be having that discussion. I don't think we had a great discussion last year.

We'll probably see more discussion about this during this election. And it will be interesting to see how the parties all fence around the issue. As I said, in April in this Top Five piece, COVID-19 means we are going to need to have a look at the tax system. Whether tax rates rise or CGT comes in are all on the table for discussion.

Getting the max KiwiSaver

And finally, you have until 30th of June to make sure you have contributed a minimum of $1,042 86 to your KiwiSaver scheme in order to qualify for the maximum government top of $521.43 cents. Now, the government contribution isn't a lot, but it's free money, so you should take advantage of it if you can.

Incidentally, PWC’s Rebuild New Zealand report suggested the question of boosting savings should be considered in order to help address the funding of New Zealand Superannuation.  It noted “While there is much to be admired with Kiwisaver, it remains a lightweight compared to the compulsory savings regimes in other countries, notably Australia”. 

The report doesn’t say so but we’re still paying for the decision in 1975 by Muldoon’s 3rd National Government to scrap the compulsory superannuation savings scheme established by the 3rd Labour Government.  In my view that decision by the Muldoon Government probably ranks as the single most economically harmful act by any New Zealand government in the past 50 years.

As I said, we've been paying for it for the last 50 years, particularly since the Baby Boomer generation reached retirement. And the matter will not go away. The Tax Working Group noted that structural deficits would be increasingly likely by the latter part of this decade. So, the issue of addressing the cost of superannuation, how it’s funded, isn't going to go away.

And on that bombshell, that's it for this week. I’m Terry Baucher. And you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening. Please send me your feedback and tell your friends and clients.  Until next time, Kia Kaha,  stay strong.

This article is a transcript of the June 12, 2020 edition of The Week In Tax, a podcast by Terry Baucher. This transcript is here with permission and has been lightly edited for clarity.

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