Claimed government support? What comes next?

In just over 2 years the Ministry of Social Development (MSD) and Inland Revenue (IR) have paid out a staggering $19.28billion and $3.95billion respectively in Wage Subsidies (WS), Leave Support Scheme (LSS) payments, Short Term Absence Payments (STAP), Resurgence Support Payments (RSP) and COVID-19 Support Payments (CSP).

With the final CSP closing for applications on 5 May 2022, the main support options which remain available to businesses are the small business cashflow loan scheme, the leave support scheme and short-term absence payment.

While the money has been dished out to businesses to provide support for them and their employees during the COVID-19 pandemic, receiving the money is not the end of it. Recipients should be ensuring that they understand the obligations which come with each payment, including how they should be treated for tax purposes.

Tax treatment

The tax treatment of each payment is not identical and the outcomes vary depending on whether the recipient is a business, a self-employed individual and whether they are GST registered. The rationale for the income tax treatment is that all the amounts are government grants, so the receipt is not taxable and therefore you can’t claim tax deductions when you spend it. The WS, LSS, and STAP are all connected to paying employees and therefore GST is of no relevance. The on-payment of any amounts to employees is taxable in the hands of the employee, and that’s why those amounts are taxable when received by a self-employed person (they are the end recipient). The RSP and CSP were paid to businesses to help pay business costs, therefore GST output tax needs to be returned on the receipt, but likewise when the RSP or CSP is spent GST input tax can be claimed back.

*Amounts should be included in the IR3/3NR and should be pre-populated in myIR

If any amounts were received close to a business’s balance date (e.g. 31 March 2022), then the full amounts received should not be treated as taxable income in the year of receipt, but the balance of unused funds should be rolled over and used in the subsequent income year.

IR expects all taxpayers to maintain records to show the payments received, what they were applied to and how the amounts were treated in tax returns (i.e. to demonstrate that the non-taxable/non-deductible treatment has been followed). This is also important to demonstrate that amounts have been used for their intended purposes, any excess amounts should be returned to either MSD or IR.

Other Obligations

The WS, LSS, STAP, RSP and CSP have all been “high trust” schemes; this was necessary because the volume of businesses seeking support meant it would be impossible for the government to verify eligibility before making payments.

Recipients of government support should ensure documentation exists and is maintained to evidence how all of the eligibility criteria have been satisfied; this is particularly important for wage subsidies where applications could be made on the basis of an anticipated revenue loss. Clear evidence needs to be kept of actual revenue losses, how the losses are attributable to COVID-19, and what steps have been taken to mitigate revenue loss; our previous articles have provided some guidance on this.

Both MSD and IR have teams working on post-claim integrity reviews and are undertaking direct checks with taxpayers. A sample of larger WS recipients have been asked to verify their eligibility for claims made. A number of cases are still being investigated, and as well as having MSD fraud investigators on the case, in some instances, the Police are involved in gathering evidence.

Decisions have been made to lay criminal charges against 15 cases to date, with court proceedings underway for 7 cases.

Amongst other things, IR will be checking to ensure that the benefit of these payments has not been passed through to business owners.

Databases allow the public to search who has received WS, RSP and CSP benefits. As a consequence, it is also possible for the public or employees to lodge complaints that are then investigated. As a consequence of investigations (and self-reviews), a number of repayments have been made, to date over $794million has been repaid to MSD. Businesses can find processes for making repayments on the MSD website.

Having clear documentation of eligibility is important not just If MSD or IR come knocking at your door, but it’s also an issue that is regularly coming up in business sale due diligence processes. Having a potential COVID-19 skeleton in your closet could impact on your ability to sell your business at a later date. We recommend that existing documentation is reviewed now to ensure it is adequate.

For more information please contact your usual Deloitte advisor.

May 2022 - Tax Alerts