Upcoming Tax Changes In The Wake of COVID-19

The Government has just announced a $12.1 billion dollar response package in the wake of the Coronovirus pandemic with the economic implications it’s slated to have. As part of this package, the government has also announced tax changes that are designed to help small businesses through this period.

We have provided a summary of the announced tax changes and what they might mean for you.

Reintroducing depreciation on commercial and industrial buildings

All depreciation deductions will be reintroduced for new and existing industrial and commercial buildings, including hotels and motels.

A Bill containing this measure will be introduced shortly. The law will allow owners of commercial and industrial buildings (including hotels and motels) to start reducing their provisional tax payments for the 2020-21 income year immediately. There is no application process as the increased deduction will be available as part of normal tax filing processes.

For example, John owns a motel with a tax book value which is lesser than $3 million. Under the existing law, it is not depreciated.  However, from 2020/21 John will be able to depreciate the current value of his building at the rate of 2%. This essentially means that John’s company can claim a deduction of $60,000 in the 2021/22 year reducing his taxable profit. The final result means John’s company will end up paying $16,800 lesser in taxes as the company tax rate is at 28%.

Immediate Deductions for low value assets

Taxpayers will be able to deduct the full cost of more low-value assets in the year they were purchased, rather than having to spread the cost over the life of the asset. Currently, taxpayers are able to claim immediate deductions on the purchase of assets valued at lesser than $500. The threshold for this will now be increased to include assets that cost up to $5000 (for the 2020/21 income year).

The temporary increase in the threshold, is designed to incentivise taxpayers to bring forward investments to encourage spending. The threshold is being permanently increased to $1,000 (from 2021/22).

For example, Capes Comics Limited is a comic book store that sells comics and other merchandise, and is looking to expand by investing in a new display cabinets worth $4,600 which the owner believes will help in increasing sales of high-value action figures that will be put up on display.

With the Covid-19 restrictions, the owner gets anxious about investing the sum, considering the fact that he can only deduct the cost of the cabinets though tax depreciation over time, and not immediately.

With the new regulations issued by the parliament, this means that Capes can claim an immediate deduction for the cost of the cabinets, which means they can reduce the tax being paid on the cabinet in this year by $1,288, instead of having that amount spread out over the years.

Change to provisional tax threshold

The government has increased the threshold for having to pay provisional tax from $2,500 to $5,000 for the 2020/2021 financial year only.

For example, Jenny is a tour guide who provides tours around Wellington through her touring company Jenny Tours & Travels Limited. She gets a majority of her customers from cruise ships visiting Wellington. For 2019/20 Jenny Tours & Travels tax liability was $8,000 but because of the recent outbreak of Covid-19 it’s 2020/21 tax liability is expected to be half the amount.

The increase in the threshold for provisional tax essentially means that Jenny Tour & Travels will not be a provisional tax payer for 2020/21 income year, so instead of paying tax throughout the year, the company will not have to pay the tax until the 7^th of April in 2022 (assuming she has a tax agent to help her), improving the company’s cashflow during the year.

Writing off interest on some late payment tax

The commissioner of Inland Revenue will be given the power to waive interest on late tax payments for taxpayers who’ve had their ability to pay their taxes on time significantly affected by the Covid-19 outbreak. The relief will apply to interest on all tax payments (including PAYE & GST) due on or after the 14^th of February, 2020.

For example, Jessica owns a tiny restaurant. Due to the outbreak, the last few weeks has seen a sharp decline in the number of customers who visit the restaurant. Due to the decline in her number of customers, Jessica’s turnover is about half of what it was a year ago, which means she won’t be able to pay her tax bill in full. She’s tried to get an extension to the business overdraft from the bank, but unsuccessfully.

Keeping these circumstances in mind, the IRD has a range of options to help customers who are struggling to meet tax payments. After evaluating these options, Jessica is able to enter into an instalment agreement to pay off her tax bill over a six-month period. This new measure will allow Inland Revenue to write off any use of money interest on this debt.

If you’re a small business owner and are facing hardship because of the Covid-19 outbreak, please feel free to get in touch with us at 09-972-2236 or info@jzr.co.nz. We would love to help.