It is strongly encouraged by IRD that employers only pass the wage subsidy amount (which is for a 12-week period) to the employee as per their normal pay cycle.
For example: If the employee is normally paid weekly, the intention of the wage subsidy scheme is that the employee receives 1/12th of the wage subsidy lump sum each week for 12 weeks as part of their weekly pay, in addition to any potential top up from the employer each week.
Paying an employee the entire 12 week subsidy in advance of the normal pay cycle is seen by IRD, under the legislative framework, as a payment to the current financial year and will have the following consequences:
- Paying the 12-week subsidy to an employee as a lump sum brings up to 12 weeks of income, that would normally be earned in the next tax year, into this tax year (which ends on 31 March 2020).
- The additional income could move them into a higher marginal tax bracket and result in them receiving a tax bill when Inland Revenue completes the automatic assessment process later this year;
- If, as a result of receiving the additional income, their total gross income for the year exceeds $48,000 they will no longer qualify for the Independent Earner Tax Credit;
- It may also impact their Working for Families Tax Credits, Child Support, Paid Parental Leave entitlements or they may receive a Student Loan bill
Here is some information about the tax treatment of the wage subsidy:
- It is not subject to GST. An order in Council has been put in place to treat it as exempt (Section 5(6E)(B) (iii GST Act)
- The wage subsidy paid to the employer is not taxable. It is excluded income under Section CX 47 Income Tax Act
- It is not deductible when paid by the employer as part of wages to employees (Section DF 1 Income Tax Act)
- It is taxable for the employee. It is included as part of their normal wages and subject to PAYE, Student Loan, Kiwisaver deductions etc
- If a partner in a partnership or a self-employed person receives it in their personal capacity, rather than as an employer, then it is taxable to them as it replaces a loss in income
- If paid to shareholder-employees it is taxable to them
Here is some information about the tax treatment of the leave payment scheme:
- The leave payment is not subject to GST. An order in Council has been put in place to treat it as exempt (Section 5(6E)(B) (iii GST Act)
- The leave payment for self-isolation paid to employees or self-employed persons is subject to tax as it is paid to replace taxable income
There is no tax consequences if an employer if they pay the 12-week wage subsidy as a single lump-sum to their employees, only for the employee.
- For employers - the receipt of the subsidy is exempt income and the payment to an employee is not deductible, so it doesn't make any difference if they pass it on now, or over time
- For employees - the intention is the subsidy amount is passed to the employee as per their normal pay cycle
Currently our firm is assisting to help make sure members have the right information to pass to their accountants to survive the current crisis. There are timetable adjustments to assist supporting late filing and remove interest and penalties due to the delays being created by the lockdown. We offer the service free of charge to members, so feel free to email ADLS and ask them to pass on your questions.
Lloyd Gallagher
ADLS Member and Convenor of the ADLS Technology and Law Committee
31 March 2020