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Wage Subsidies

April 17, 2020

Has your business been adversely affected by Covid-19? Are you an Employer, a Sole Trader or Self-Employed? Have you applied for the Wage Subsidy?

We have already discussed the Wage Subsidy with a considerable number of clients but we are concerned that, if we have not already spoken to you, you may not have applied because you are not yet sure if Covid-19 will affect your business

Please call us if you have not yet applied for the wage subsidy to talk through your options.

If you have applied and received your full subsidy, please contact us if you have any questions about how your reconcile these payments into your systems

A recap on Wage Subsidies:

Wage Subsidies

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.

To qualify:

  • your business must be registered and operating in New Zealand
  • your employees must be legally working in New Zealand
  • the business must have experienced a minimum 30% decline in actual or predicted revenue over the period of a month when compared with the same month last year, and that decline is related to COVID-19
  • your business must have taken active steps to mitigate the impact of COVID-19
  • you must make best efforts to retain employees and pay them a minimum of 80% of their normal income for the subsidised period.

The COVID-19 Wage Subsidy will be paid at a flat rate of:

  • $585.80 for people working 20 hours or more per week
  • $350.00 for people working less than 20 hours per week

The subsidy is paid as a lump sum and covers 12 weeks per employee.The Government has since removed the original cap of $150,000 per business.

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: Well Oiled Motors Ltd

Kiri is a shareholder in a mechanic business, Well Oiled Motors Ltd, in which she regularly is paid a wage. Kiri’s business is adversely affected by COVID-19 and is eligible for the wage subsidy. She applies for and receives a $7,029.60 wage subsidy payment from MSD.

As Kiri is paid regular wage payments from her company, her pay is ordinarily subject to PAYE and other withholding obligations. Kiri uses the wage subsidy from MSD to continue to fund her wages over the 12-week period the subsidy applies to. Well Oiled Motors Ltd does not have any GST or income tax obligations in relation to the wage subsidy. Well Oiled Motors Ltd processes Kiri’s wages in the normal manner through its payroll system. PAYE and Kiwisaver deductions will continue to apply to the gross amount paid by MSD.

Example: Mark, Self-employed Plumber

Mark is a self-employed plumber with a standard balance date of 31 March. He employs Mary part-time to assist with book-keeping and other general administration work that is required within the business and has a full-time apprentice. Both Mary and the apprentice receive regular wages. As a result of the impact of COVID-19, Mark’s business is facing significant financial pressure. On 27th March he applies for and receives a wage subsidy of $18,259.20 from MSD for himself, his apprentice plumber and Mary.

Employees

$7,029.60 of the wage subsidy is required to be passed on to Mark’s apprentice ($585.80 per week for the 12 week period of the wage subsidy) and $4,200 of the wage subsidy is required to be passed on to Mary ($350 per week for the 12 week period). These amounts will be treated as ordinary PAYE earnings in the hands of Mark’s employees with the relevant Kiwisaver, child support, student loan and PAYE deductions withheld. This portion of the wage subsidy which relates to Mark’s employees will be processed in the normal manner, regularly through its payroll system and the business will not take this portion of the subsidy into account when calculating its income tax liability. Please note these amounts should not be grossed up, therefore PAYE etc is deducted from the amounts of $7,029.60 and $4,200 respectively.

Self-employed individual

The remaining $7,029.60 of the wage subsidy relates to Mark’s own work in the business. Mark is required to account for income tax on this portion of the wage subsidy as it relates to Mark’s personal lost earnings. Mark will include this portion of the wage subsidy (the $7,029.60), in addition to his regular income for the rest of the year, in his Individual income tax return (IR 3).

Working out what part of the lump-sum subsidy is Mark's - for his work in the business

As the subsidy covers a 12 week period from the date it was credited to Mark’s bank account on 27th March 2020, Mark must caclulate what part of the lump-sum subsidy is for his own work in the business. Mark must calculate the part of the subsidy relating to the year ended 31 March 2020 and include this in his 2020 Individual income tax return - IR 3 (= $333.74 for the 4 days to 31 March 2020). The balance of the subsidy (= $6,694.86) relates to the period 1 April 2020 – 31 March 2021 and Mark will include this amount in his 2021 Individual income tax return – IR3.

Note: 12 weeks = 84 days to which the wage subsidy relates. 4/84 x $7,029.60 = $333.74 for the 4 days 27th March 2020 – 31st March 2020 to be included in the 2020 tax return. 80/84 x $7,029.60 = $6,694.86 for the remaining 80 days in the 2021 tax return. There are no GST implications on the receipt of the $18,259.20 wage subsidy.

Example: Stef's Jet Skis Ltd

Stef's Jet Skis Ltd offers boat tours in Queenstown. It employs 5 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). Stef's Jet Skis Ltd is 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 received
  • 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 to the employer to subsididise the gross payment of wages 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.

Please note that the wage subsidy amount should be included and returned as a gross amount in an employee’s pay, not a net amount.

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. 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, in addition to her regular income for the rest of the year, in her Individual income tax return - IR3.

Please note that the tax-free treatment in respect of employers who receive the wage subsidy for their employees does not apply to self-employed people who receive the subsidy for their personal loss of income. The subsidy will only be tax free as excluded income for a self-employed person to the extent it is used by them to subsidise wages of their employees.