If you’re a GST registered business, don’t spend your full insurance payment without thinking about the GST impact!

Most insurance payments, made to GST registered businesses/individuals for business risks that have been insured against are made on a GST inclusive basis. This means that 3/23rds of the insurance payment needs to be included in your GST return and paid to Inland Revenue. There are some exceptions to the rules so please confirm the relevant treatment for you with your tax advisor. Normally it does all work itself out in the end, as when the business uses the insurance payout to fund the purchase of replacement goods, the business will get to claim back the GST on those costs.

Grants

Various organisations, including central and local government, as well as private/public companies can make funding available in times of crisis to assist impacted businesses and individuals.

Often these are distributed following applications. You need to be aware that different applications may have different GST requirements. There are two aspects to this, the first is determining whether the grant will be treated as “GSTable” income with 3/23rds being included as income in your GST return and paid to Inland Revenue, and the second is what the application's requirements are regarding the application being made on a GST inclusive basis.

This is an area of confusion, even with larger taxpayers. Before April 2022, when the Government made grants to local councils, some councils failed to consider the GST impact and would commit support of the GST inclusive figure to the community. For example, if the Government announced that it was giving $100,000 to a mayoral relief fund it was in fact only giving $86,957 and expecting the council to pay GST of $13,043 to Inland Revenue. Post-April 2022, these grants are now made exclusive of GST and GST is added to the announced amount when the payment is made. Using the same example of $100,000 grant funding being announced, now $115,000 is given to the mayoral relief fund, with $15,000 being returned to Inland Revenue.

In order to determine the GST treatment you need to know:

• Who is distributing the funds?
• What they are being distributed for?
• Whether there are any special legislation/regulations that allow the payment to be exempt from GST.

All these tax issues are before even considering any specific tax relief measures that may be introduced for major disasters. We understand that Inland Revenue is currently considering whether the concessions introduced for the Canterbury Earthquakes may be appropriate for Cyclone Gabrielle. These measures included:

• Depreciation recovery income rollover relief – effectively allowing a taxable outcome for asset disposal to be deferred and applied against a replacement asset’s value instead, which helps taxpayers have more of their insurance funds available for recovery efforts and quality replacements, rather than paying tax.
• Uneconomic-to-repair situations – engineers are famous for saying anything can be achieved or repaired with sufficient time and money, which doesn’t help when trying to determine whether an asset has been “irreparably damaged” or a building “rendered useless” for disposal purposes. This concession created deemed disposals to trigger the asset disposal rules (with instant reacquisition of the dilapidated asset for $0).
• Optional timing rules – allowing insurance income and any related deductions for repairs or disposals to be deferred in their entirety until there is full clarity for costs and receipts.

These concessions were invaluable for taking monetary and tax compliance pressure off taxpayers. However, as you can imagine, each concession had its own requirements and potential fishhooks to be aware of (e.g. an uneconomic to repair building may become revenue account property going forward if there’s a purpose or intention to dispose of it at the time of the deemed disposal and reacquisition), not to mention deferred tax implications. The earthquake concessions were also drafted under urgency, so they were not necessarily as tidy as other parts of tax law, but with only a limited life to the concessions, there was little interest in revising for clarity. We’ll have to wait and see what happens in this space for Cyclone Gabrielle tax relief.

The Inland Revenue have announced some initial tax relief and assistance for taxpayers impacted by both the flooding and Cyclone Gabrielle. They have an information pages for concessions and assistance which includes:

- Donated trading stock concession extended
- Removing penalties and interest charged on late filing or late payment
- Extension to the filing deadline for R&D Tax Credits- Paying by instalments
- Financial hardship support
- Estimating provisional tax
- Income equalisation scheme
- Child support assistance
- Updating estimated income for Working for Families
- Tailored tax codes