Hi there accounting fans! For today’s article, I am joined by Jimmy Ling from JL Freedom Consulting. We’ve put our heads together to come up with a summary of the Tax Relief measures that the NZ IRD has come up with for business owners and self-employed individuals everywhere!
As the economic impacts of the COVID-19 financial crisis begins to be felt by many businesses around NZ, the IRD has stepped up their game and announced tax relief measures across the board that are aimed at putting more cash in the hands of businesses and self-employed individuals here in NZ.
Broadly speaking, there are two key changes in tax policy and a wide-range of hardship relief that the IRD is offering.
First off, let’s talk about the two key changes in tax policy:
Change of provisional tax threshold from $2,500 to $5,000 (2020-2021 income year)
There are 4 different methods to account for provisional tax but for simplicity, we will talk about the most common method used, the Standard Option below.
Prior to the 2020-2021 income year, if you have tax to pay of $2,500 or more, you were required to pay provisional tax, which is a form of advance instalments you make at set intervals to the IRD for the next financial year based on a 5% increase of your tax to pay in the current year. The IRD then will tell you to pay an additional terminal tax or you might get a refund at the end of the next financial year depending on whether the provisional tax is under or over the calculated tax payable.
Look – if it doesn’t make sense to you, don’t worry. Even on the best of days many accountants find calculating provisional tax tricky (which is why we have software to do it for us!).
The main takeaway from this change in ruling means that if you have tax to pay of $5,000 or less, under this new ruling – you don’t have to make payments in advance to the IRD for the next year’s taxes. The main reason for this ruling is to put cash in the hands of small business owners for a bit longer.
For Example:
Sam has tax to pay of $3,000 in the 2019-2020 financial year and has a balance sheet date of 31 March 2020. Therefore he estimates provisional tax to pay for the next year of $3,150 (5% uplift). This is divided into three provisional instalments payable by August 2020, January 2021 and May 2021.
In 2020-2021 tax year, Sam has tax to pay of $3,000 as well (which means he gets a refund of $150 from IRD – as his instalment payments amounted to more than his tax payable). However, he does not have to pay provisional tax for the next year as it is below the $5,000 threshold. He will still have to pay tax at the end of the next financial year in a lump sum.
Basically, in the example above, in the 2020-2021 tax year, Sam can hang on to his cash for longer before having to pay the IRD its dues. The money that he holds on to can be used to invest in his business, pay his team member wages, engage in income generating activities, etc, until he has to pay his taxes at the end of the year.
Change in depreciation rules in the year 2020-2021
Arguably the most significant change that the IRD has put through in response to the COVID-19 crisis. If you don’t know what depreciation is, head on to this handy article I wrote last year explaining what depreciation is and how it works. Be sure to read it, otherwise the rest of this section won’t make sense.
Now, depreciation rates are determined by the IRD – you can never claim more for an asset than the prescribed rate that the IRD has set on it. There are two main changes to the depreciation rates that the IRD have done:
Commercial buildings/properties can now be depreciated
Prior to 2020-2021, there was 0% depreciation on all types of buildings and properties (fittings and improvements could be depreciated though and that has still remained unchanged). The prescribed rate for depreciation is 2% on a diminishing value basis and 1.5% on a straight-line basis.
Diminishing Value? Straight line? If you find yourself asking these questions you need to go back and read up on what depreciation means!
What this means in practice is that you can claim depreciation expense on your buildings – potentially giving you a huge tax expense claim you can use to offset your taxable income.
Let’s take an example:
Sara owns a commercial property which she rents out to cafes and retail outlets in the Hamilton City Centre. The value of the property on her books is worth $4,000,000. With the new depreciation rules, she can claim 2% depreciation (Diminishing value) on this property. 2% of $4,000,000 is $80,000 which she can claim as expenses during the year 2020-2021.
$80,000 is a lot of money to claim for expenses! You can immediately see how this ruling reduces the amount of tax that property-owning business owners have to pay in the coming years.
IMPORTANT: Residential properties are still not eligible for depreciation. If you are a landlord and hold residential properties which you rent out – these properties are not eligible for depreciation.
Increasing the depreciation threshold from $500 to $5,000 (2020-2021 only) and to $1,000 (2021-2022 onwards).
Have you heard of the depreciation threshold? If you aren’t an accountant – chances are that you haven’t. Or your accountant might have said something about it to you and it went straight over your head. Basically, any item which you purchase which costs over the threshold – gets capitalised as a fixed asset and you claim depreciation on it. Any item below the threshold gets treated as a regular expense and you claim it, in full, in your income statement.
For example:
Raj buys a robo-vacuum for his office which costs $1,000 (ex-GST). Under the 2019-2020 tax rules, he needs to register this robo-vacuum as a fixed asset and claim depreciation on it as it costs more than the $500 threshold. At the same time, Raj buys a lounge sofa for the office at a bargain price of $400 (ex-GST). Raj can claim the price of the lounge sofa in full under ‘office expenses’ as it is below the $500 threshold.
So you see, the difference is that you can claim expenses upfront, in full for items purchased under $500. Anything above that, you depreciate as per IRD guidelines.
Now, the depreciation threshold has been raised to $5,000 for the 2020-2021 tax year. What does this mean? Simply put the IRD has raised the threshold TENFOLD to encourage business owners to make capital expenditure, buying up assets to help generate income for their
business. The key takeaway here is that for assets up to $5,000, you can CLAIM THE ENTIRE AMOUNT AS TAX DEDUCTIBLE EXPENSE UP-FRONT no questions asked!!
For example:
Raj buys a second-hand van to make deliveries in June 2020. The van cost him $4,050 (ex-GST). Under the 2020-2021 tax year, he can claim this expense in full under ‘Motor Vehicle Expenses’. He does not have to register it as a fixed asset.
Instead of depreciating the van at 30% diminishing value or so every year for the next 3 to 4 years, Raj gets to claim the entire amount up-front, thereby reducing his tax payable for the 2020-2021 year.
It is important to note that the $5,000 threshold only applies to the 2020-2021 year. From 2021-2022 onwards, it will be revised down to $1,000 (which is still better than the $500 threshold!).
Hardship allowances and reliefs
The COVID-19 financial crisis will hit many of us hard. So the IRD has put in place several measures which allow individuals to ask for a deferment, revisal or a write-off of payments under different categories which include:
- Kiwisaver
- Student loans
- Child support
- Working for families tax credits
If you are a contractor or in business for yourself, you can apply for a certificate of exemption if your income has been disrupted by COVID-19.
For tax amounts that are overdue, IRD will hit you with a Use of Money Interest (UOMI – if you say it fast enough it sounds like ‘You Owe Mon-ay’) for holding their money, similar to how a bank pays you interest for holding your money.
If you have difficulty meeting your tax obligations and have incurred penalties and interest, there is good news. You can contact IRD highlighting your situation; ensure you have proper documentation and evidence to support your financial position.
There are hardship relief provisions available which have been revised in light of the COVID-19 crisis which means you can pay through instalment arrangements, potential write-offs of UOMI and penalties and even core debt in some instances.
In terms of eligibility, IRD will look at this on a case-by-case basis. Please contact your accountant in the first instance. They will be able to look at your financial situation, recommend the best approach to take and prepare your application for financial relief.
Further information on the hardship tax reliefs can be found here.
Stay safe and stay informed!
Kia Kaha NZ!