Covid-19

The uncertain world of Covid-19 tax relief

Businesses and tax lawyers are scrambling to come to grips with the Covid-19 rescue package. Dileepa Fonseka looks at whether a GST cut or a provisional tax holiday would deliver faster cashflow injections.

Inland Revenue has been flooded with requests for help as a result of the economic repercussions of Covid-19.

Since February 10 the IRD has been contacted 1625 times with tax queries related to the pandemic. 

Thirty percent (492) of those queries were made the day after the Government announced a $12.1b package to counteract an economic downturn brought on by Covid-19.

By comparison, a week earlier (on March 11) just 33 people made contact with IRD.

'We're boring tax accountants'

Deloitte tax partner Robyn Walker said most people who contacted her with Covid-19 queries had questions about the wage subsidies in the package rather than the tax part of it. 

The subsidies make up $5.1b of the Covid-19 rescue bundle but for many the details of how it will all work are unclear, Walker said.

After the Government laid out the policies on Tuesday the exact workings of it are beginning to be determined by tax lawyers and bureaucrats.

Deloitte tax partner Allan Bullot said it was a change of pace for tax lawyers who usually waited for legislation to be drafted before they determined what it might mean for people.

“We’re having to react differently just like everybody else,” Bullott said.

“We’re boring tax accountants. We normally get legislation [and] pore through legislation,” he said.

‘The smaller end of town’

Bullot said he understood legislation would come before Parliament next week formally allowing IRD to waive “use of money interest” (UOMI) for companies affected by Covid-19.

UOMI is the interest IRD charges when late payments of tax are made. The Government mentioned UOMI would be waived for some businesses in its announcement on Wednesday.  

Bullot said that option could only be used after companies had exhausted all others. 

He also said it was a mistake to think of deferred tax as a “tax holiday” because the tax would eventually need to be paid.

“It’s not the same sort of tax holiday that we’ve seen in some other jurisdictions,” Bullot said.

“This one’s a bit different to the wage subsidy. This is: ‘you are in real financial stress’, not just that your revenue is down 30 percent,” he said. 

“It’s in effect entering into a payment scheme with Inland Revenue."

That would likely rule out larger players in the tourism sector, like hotels, who employed thousands of staff and were hit hard by the Covid-19 downturn.

“This waiving of ‘use of money interest’ is going to be at the smaller end of town,” Bullot said.

Larger businesses had other options. They could borrow money, shed staff or sell assets before they had to negotiate a payment plan with IRD, he said.

GST

Bullot is against lowering GST to counter the economic effects of Covid-19 as some commentators have suggested.

... the last change of GST took four months to push through. It involved businesses and others changing a lot of things including computer systems and prices.

That’s not because he doesn’t believe reducing GST would add stimulus into the economy, but because any change of that sort would take too long to implement.

Bullot said the last change of GST took four months to push through. It involved businesses and others changing a lot of things including computer systems and prices.

“It’s easy to say just change the GST rate, but there’s an awful lot more to doing that than people think,” Bullot said.

“I don’t think that’s the way to stimulate the economy,” he said.

A better way might be to simply not collect GST for a while. That would effectively give an interest-free Government loan to businesses, he said.

Bullot said GST could also be used to push money into companies in struggling industries.

“If you’ve got a hotel that has previously been returning $10,000 of GST a month to the Government and now it’ll only be returning $5,000 then maybe you’ll be in a situation where you can waive $1000 of that to allow them to keep on more staff,” Bullot said.

“That sort of aspect at the tail end, rather than a straight rate cut, is the best way to approach it if you’re going to do anything,” he said.

Tax returns due as pandemic rolls on

Walker said another part of the package that allowed depreciation on commercial buildings to be written-off would probably not make much of a difference to businesses that posted a loss this year.

However it could make a difference in future years as that loss was carried forward, she said.

“It does depend on the tax profile of the company, but if it’s in losses and badly affected by Covid-19 it [depreciation] won’t provide any immediate help from a cashflow perspective,” Walker said.

She said another part of the Government’s package, increasing the provisional tax threshold from $2500 to $5000, would mean 95,000 taxpayers wouldn’t have to pay that tax. 

Walker said provisional tax was usually paid by people who had a second source of income that wasn’t taxed at its source. 

She gave the example of a rental property that earned a modest $5000 each year. That income wasn’t taxed at its source so the person earning it would usually be liable for tax on it. 

A measure that could stimulate more spending was the write-off of low-value assets, Walker said.

It could encourage businesses to upgrade assets like personal computers for their workers.

Such a purchase made this year could be written off in one year and the company would not need to track the asset’s depreciation in a register, she said.

However, top of mind for Walker’s clients were their tax returns that are still due on March 31 despite the pandemic. 

People didn’t just have questions over how they would pay that tax but on how they would provide a signed declaration if the country ended up in social distancing ‘lockdown’ before the deadline fell, she said.

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