(RSP/CSP – 5 minute read)
Hi there NZ accounting fans! If you were affected by the COVID lockdowns, you would have applied for the RSP/CSP.
RSP – Resurgence Support Payments.
CSP – COVID-19 Support Payments.
Both of these payments have been issued by the IRD. They are aimed to support viable businesses overcome cash flow difficulties that arose due to COVID-19. They both have different names, but the tax treatment for them are the same. If you have received these support payments, you need to make sure that you account for them correctly. Here’s how to do it.
GST treatment
GST (Goods and Services Tax) is a tax levied on the consumer. As long as you make sales to an NZ-based client/consumer, you have to collect GST on those sales. The RSP/CSP is treated the same way. Every RSP/CSP payment made to you is INCLUSIVE of GST. The amount you receive has GST in it already.
For example: You receive $4,400 from the IRD for the most recent RSP/CSP payment. This payment includes GST of $573.91 ($4,400 X 3/23). You need to declare this amount in your GST return for the period. Did you forget to make the payment? You need to make sure that you include it in your next GST return.
Remember that the IRD has a record of you taking the RSP/CSP – you MUST abide by the proper tax treatment on the support payment.
Please note that if you are not GST registered, you don’t have to return GST on the RSP/CSP.
Income tax treatment
Here’s where things get tricky.
Nominally, the RSP/CSP is not considered income for income tax purposes. However, when receiving the RSP/CSP there are two things you need to be aware of:
- You cannot pass on the RSP/CSP amount to the owner/shareholders via drawings, shareholder salary, dividends, loans or any other method.
- Any expense that you spend the RSP/CSP on is not tax deductible.
This essentially means that you WILL be paying taxes on the RSP/CSP received. Here’s how it works:
You have made a profit of $15,000 during the last financial year. 2022 was a good year with sales of $70,000 and expenses of $55,000. You had a bit of a rough patch from October 2021 to February 2022. Fortunately, the RSP/CSP payment came to the rescue and you made it through! In total, you applied for $21,000 worth of RSP/CSP.
If you are keeping track of non-deductible RSP/CSP expenses as you go along, your profit figures should be correct. However, most business owners won’t have the time/headspace to do that.
If like most business owners, you’ve just been spending and recording expenses as usual, you will have to adjust for the RSP/CSP before filing your taxes. Using the example above, you have to recognise $21,000 worth of expenses as non-deductible. This will show the IRD that you have used the RSP/CSP given to you for business expenses. This means that your deductible expenses decrease from $55,000 to $34,000. This will increase your profit of $15,000 by $21,000 to $36,000.
In other words, there is a flow through effect of the RSP/CSP which will increase your profit, and by extension, your taxes.
Please note that if you are GST registered, only the GST exclusive portion will need to be offset against your expenses. If you are not GST registered, the entire amount is to be offset against your expenses.
For example: On an amount of $4,400 (GST Inclusive) the GST registered business has to offset $3,826.09 ($4,400 divided by 1.15) against expenses. The non GST registered business has to offset the whole $4,400 amount.
So, this means I still have to pay taxes on the RSP/CSP?
In practice, yes. This can be a bit of a shock to businesses that have run at a loss. If their RSP/CSP amount is larger than their loss, they may suddenly find a tax bill to pay at the end of the year. The RSP/CSP is not a grant. It is a support payment. And you still have to pay taxes on it.
What if I took more RSP/CSP than I had recorded expenses?
Say, for example you took $21,000 worth of RSP, but you’ve only spent $10,000 on your business during the financial year. This means that you still have $11,000 worth of unused RSP.
Based on my communications with the IRD, the correct treatment is to roll over the balance and use it in the following year(s) until it is completely offset. If you close your business before you can finish using the RSP/CSP grant, then you should return any remainder to the IRD. In any case, you need to keep a record of the expenses that you have paid for using the RSP/CSP grant.
This means you don’t have to worry about paying back any unused RSP/CSP provided that your business is still in operation.
Use the correct tax treatment!
The accounting and tax treatment for the RSP and CSP can be confusing. However, if you have received these support payments, it is your duty to make sure that you pay taxes on them correctly. The purpose of these payments are to support your business so that it can survive. More importantly, it needs to survive so that it can continue paying taxes in the future to cover the cost of all this support!
So please, record your RSP/CSP correctly and pay your taxes!