TAX TREATMENT FOR THE COVID-19 EMPLOYEE WAGE SUBSIDY SCHEME - WHAT EMPLOYERS NEED TO KNOW
Information provided by Inland Revenue
Employers, including sole traders and the self-employed upon application, may be eligible for a wage subsidy paid by the Ministry of Social Development (MSD) if they have been affected by COVID-19.
Wage subsidies should be passed onto the employee by the employer and processed as part of the employee's normal wages. All deductions (such as PAYE, KiwiSaver and child support) should be made as normal.
If the total wage (the subsidy plus the employer funded pay) amounts to the same wages as previously, the pay and deductions on their payslip should be the same. You may choose to top up the subsidy with cash payments or annual leave, but this should be arranged between the employee and employer.
The employer will not be liable for income tax or GST on the subsidy received from MSD and will not be entitled to an income tax deduction for wages paid out of the wage subsidy.
Example: Stef's Jet Skis Ltd
Stef's Jet Skis Ltd offers boat tours in Queenstown. It employs five full-time staff and 10 part-time staff. Its main customers are international tourists. As a result of COVID-19 it has seen a significant reduction in bookings and, with the closing of the borders, expects this to get worse over the coming months.
Stef's Jet Skis Ltd is eligible for the wage subsidy. When it applies for the subsidy, it receives a $75,158 lump sum payment from the Ministry of Social Development (MSD). They are required to pass the subsidy on to its employees. It is not:
liable for income tax on the subsidy received as this is excluded income
required to account for GST on the subsidy receive
entitled to an income tax deduction in relation to the portion of wages paid funded by the wage subsidy.
Stef's Jet Skis Ltd can now afford to pay its staff the equivalent of their regular wage. The subsidy is included and processed in the company’s ordinary payroll with the relevant KiwiSaver, child support, student loan and PAYE deductions withheld.
Example: Blue Sky Ltd
Blue Sky Ltd has 40 full time employees. It applied for the wage subsidy when it was first announced and received a payment from the Ministry of Social Development (MSD) of $150,000 (as per the initial cap). As Blue Sky Ltd is now eligible for a wage subsidy of $281,184, MSD has made an additional payment of $131,184 to Blue Sky Ltd. Both payments are excluded income and will not be taken into account by Blue Sky Ltd when calculating its income tax liability. As the payment is a subsidy there are no GST implications on its receipt for Blue Sky Ltd.
The MSD payments are made by MSD gross and therefore remain subject to PAYE and other usual employee deductions. Blue Sky Ltd is only able to pay its employee 90% of their regular wage, including the wage subsidy. The wage subsidy and (reduced) pay are processed by Blue Sky Ltd in the normal manner through its payroll system, and PAYE and KiwiSaver etc are deducted from the payments, withheld by the employer and passed on to us.
Example: Self-employed dance teacher
Ani Kowhatu is a self-employed dance teacher and provides regular private lessons at her home, as well as tutoring a couple of dance students at a local high school. Based on her accountant’s forecasts, she is expecting a 90% loss of income in April 2020 compared with April 2019. She does not employ any other dance instructors and is not registered for GST. Ani applies for and receives a $4,200 wage subsidy from MSD.
Ani is required to account for income tax on the wage subsidy received as it is a payment to replace loss of earnings. Ani will include the subsidy, as well as her regular income for the rest of the year, in her Individual income tax return - IR3.
Example: Food Bank Wellington
Food Bank Wellington is a registered charity which operates a small second-hand shop to help generate funds for the food bank it operates. Although there are volunteers who work in the second-hand shop, it also employs three part-time staff who are university students. Food Bank Wellington applies for and receives a wage subsidy from the Ministry of Social Development (MSD) of $12,600. Food Bank has no income tax or GST obligations in respect of the subsidy received.
Food Bank Wellington includes the wage subsidy from MSD in the pay of its part-time employees. With the wage subsidy it can continue to pay its employees while it is shut down. The subsidy is made as a gross payment from MSD and Food Bank Wellington withholds PAYE, KiwiSaver and student loan from the payments as it would with regular wages.
If you'd like assistance with any upcoming tax treatment on employee wages, get in touch.