There has been a confusion amongst many tax payers, not necessarily the ones in small and medium size business but also amongst some of the large tax payers, on whether the Covid-19 wage subsidy is taxable or not taxable.
According to the Inland Revenue Department website we can see a broad notification under the url www.ird.govt.nz/covid-19/business-and-organisations/employing-staff/wage-subsidies as detailed below:
The employer is not liable for income tax or GST on the subsidy received from MSD and is not entitled to an income tax deduction for wages paid out of the wage subsidy.
While most tax payers read the first part (not liable for income tax or GST) they do not proceed to read and assimilate the latter part which contains the sting in the tail!
It is true that the wage subsidy received in general is not liable for income tax or GST, but one should remember that the wages paid out of the subsidy received are not tax deductible to the tax payer. Let us explore this with a small example:
Company A applies and gets wage subsidy of say, $15,000 from the Government. It has a wage bill over the period that is applicable to the receipt of wage subsidy of say, $18,000. Based on the current rules, the subsidy of $15,000 is not taxable and wages paid to the extent of $15,000 (of the $18,000 paid by the company) are not deductible! In reality most of the tax payers tend to believe that $15,000 is not taxable and $18,000 is tax deductible! Can this be true?
In a typical business such as yours, the wage payments are taken to wages expenses directly and are normally treated as a deductible expense. Because of this normal treatment, the wage subsidy received is required to be taken to some kind of income (taxable) to the extent it is used for paying the wages. Therefore, we can say that the wage subsidy is in fact taxable, but the tax on this income is offset by the tax deduction on the subsidy paid out.
A lot of confusion may have been avoided if the Government and the IRD explained this position clearly to all business owners.
We would even say that it may have been better to disclose that these wage subsides are taxable receipts to the business, instead of saying that they are not taxable to start with. We would have preferred omitting the statement that the wages paid out of the subsidy are not tax deductible! This, in our view, may have made the taxable nature of the wage subsidies clear to business owners.
More importantly, it needs to be mentioned that the subsidy is in fact taxable in the hands of the final recipient. If you are self-employed and have wage subsidy, you will include this as a taxable income and are required to pay tax on this subsidy receipt at your marginal tax rate.
If you are trading under a company and normally get shareholder salary paid out from the company, this will be included as income in your hands as the shareholder and will not form part of taxable income to the company.
In conclusion, most business owners and tax payers will feel the impact in the 2021 tax year, barring some who may have received the wage subsidy before 31 March 2020 and disbursed wages before 31 March 2020. Both the IRD and the Government could have handled this in a better manner and avoided this confusion.
The team at Johnston Associates wish the Ponsonby News readers all the very best in these hard times, and we are here if you need us! (LOGAN GRANGER)
Disclaimer – While all care has been taken, Johnston Associates Chartered Accountants Ltd and its staff accept no liability for the content of this article; always see your professional advisor before taking any action that you are unsure about.
JOHNSTON ASSOCIATES, 202 Ponsonby Road, T: 09 361 6701, www.jacal.co.nz
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