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Terry Baucher on how the tax changes included in the Government's COVID-19 support package will provide immediate relief and encourage investment

Terry Baucher on how the tax changes included in the Government's COVID-19 support package will provide immediate relief and encourage investment
Grant Robertson

The Government has released details of its COVID-19 support package and I'm here to discuss the four specific tax measures which form part of that response.

These measures are a mixture of giving immediate relief to taxpayers, who are going to be feeling the pain right now. They are also hoping to encourage investment activity going forward as the eventual recovery takes place.

There were a few surprises in this with the big surprise being the reintroduction of depreciation on commercial and industrial buildings. And this includes hotels and motels. So clearly this is of interest to a sector, the tourism sector, which is going to take a very significant hit as this COVID-19 pandemic continues.

The proposal is that depreciation will be reinstated for those buildings, and a diminishing value rate of 2% is proposed. (They're working on the straight-line rate and hadn't yet finished the actuarial calculations on this).

And quite apart from this welcome measure for industrial buildings it also means the capital cost of seismic strengthening will now be depreciable. This has been a sore point for many building owners for quite some time. And in my view, it is a matter that it should have been addressed some time ago.

But leaving that aside, it is an incredibly welcome move to see the depreciation restored in general for commercial industrial buildings and acknowledging that this would include the capital cost of seismic strengthening. It's worth noting as well that this was one of the recommendations of the Tax Working Group. They suggested that they couldn't really see any valid reason to continue the policy adopted in 2011 of stopping depreciation on industrial and commercial buildings.

Looking back on the papers from that 2011 Budget, the impression I gained was that that measure was one which was designed to actually balance the books and wasn't really driven by anything around the fact that there was no economic depreciation going on. Quite clearly buildings depreciate and need replacing. That was true then and it's true now so it's simply great to see such a measure.

It's an expensive measure, estimated to cost $2.1 billion over the forecast period to the 2023/24 fiscal year. I know from business owners and those with property investments in this sector that this will be very, very welcome. The legislation will obviously be rushed through shortly and it is intended to take effect from the start of the 2020/21 tax year, which for most people is April 1.

Also extremely welcome for taxpayers is the proposal to increase the low value asset 100% write off. This is something the small business sector has frequently requested.

This measure contained a surprise in that the level will be increased from $500 to $5,000 for the 2020/21 tax year before falling back to a new increased level of $1,000 with effect from the start of the 2021/22 income year and going forward.

The current $500 threshold has been in place since 2005 if memory serves right. So it was long overdue for an increase. The one-off increase to $5,000 follows a measure the Australians did a couple of years back. This is again extremely welcome. It will encourage investment, but it also greatly simplifies small businesses’ compliance costs.

The measure is estimated over a four-year period to cost $667 million. That's not as much as I had thought, given that Inland Revenue and Treasury had been previously reluctant to increase the threshold. Again, a very welcome measure. The $5,000 is a bit of a surprise, but again, it's a good opportunity for businesses once they come through what is going to be frankly, a pretty rough few months. No one's sugarcoating that but looking ahead they may take the opportunity to upgrade their equipment and invest in new plant and machinery.

Small businesses and individual contractors and the like will welcome the decision to increase the provisional residual income tax threshold from $2,500 to $5,000. And that means with effect from the 2020/21 tax year that basically enables those taxpayers who meet that threshold will be able to defer paying their tax for the coming tax year to basically February 7, 2022.

So that immediately gives some cash flow relief for the micro businesses that are going to be really affected by what's happening around us right now. The estimated cost of that is about $350 million. But it is a more a deferral because it means the tax is going to be paid later than previously anticipated.

The final specific tax related measure gives the Commissioner of Inland Revenue discretion to write off and waive interest on late tax payments for taxpayers who've had the ability to pay tax "adversely affected" by the COVID-19 outbreak.

Now the use of money interest rate is currently 8.35% and surprisingly, no announcement was made about reducing that rate. I think officials were of the view that that can wait till the regular review, which must happen now in the wake of the OCR cut we had on Monday. So, we probably will see very shortly the use of money interest rate on unpaid tax come down and that will be of help to taxpayers as well.

This is actually applicable from February 14 and it covers all tax payments, which includes provisional tax, PAYE and GST due on or after that date. Taxpayers who are struggling to meet those payments will be able to apply to Inland Revenue and say, ‘we are struggling here as a result of the COVID-19 outbreak’. The requirement is for a "significant" fall which is defined as approximately 30%.

This initiative is going to last for two years from the date of enactment of the announcement unless it's extended by an Order in Council. So that's good news. I've already had a few inquiries from clients about what do we do when we're struggling to meet payments. And this is a very welcome relief.

Incidentally, although not specifically mentioned in the announcements, by implication, the late payment penalties and late filing penalties are already going to be suspended as part of this measure to help businesses. Again, a good measure. My longstanding view is that the late payments system does not work and should just simply be scrapped. Hopefully we'll see something major on this later this year. For the immediate time, suspending use of money interest is a very welcome step.

Just briefly on the other announcements, obviously the leave and self-isolation support and the wage subsidy schemes for small businesses, are going to be very welcome. These schemes apply to independent contractors, so that's going to be a great deal of relief and take off some of the pressure for them. And for all small businesses, we'll be looking at the question of what do we do about self-isolation if key staff were taken out of work. This will help considerably.

Interesting point which has also happened and has gone a bit under the radar, is that for working for families, there is an in-work tax credit, which is a means tested cash payment of $72.50 per week. This was only available to families that who are normally working at least 20 hours a week if they were sole parents, or 30 hours a week if couples. The hours test has now been removed, so about 19,000 low income families are going to benefit from that change. And I know the advocates of Child Poverty Action Group, they're very pleased at what's in this package with the help for low income families and beneficiaries.

I'll have more on this week's tax events with my regular podcast on Friday. But in the meantime, that's it for this special edition of the Week in Tax.

I'm Terry Baucher and you can find this podcast on my website or wherever you get your podcasts. Please send me your feedback and tell your friends and clients. Until next Friday have a great week. Ka kite āno.

This article is a transcript of the March 17, 2020 edition of The Week In Tax, a podcast by Terry Baucher. This transcript is here with permission and has been lightly edited for clarity.

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"obviously the leave and self-isolation support and the wage subsidy schemes for small businesses, are going to be very welcome"

That's well and good in theory, but the devil's in the details, particularly the application, examination and approval process.

Frankly, I rate the chance of getting a whole lotta brown cardies up to the task of reading PL's and Financial Position statements from applicants, rendering a quick (days, not weeks) decision, and opening the munny tap, about as good as Sisyphus' chance of getting that rock to the top of the hill.

And there's a considerable opportunity cost for the self-employed in terms of time taken out of billable hours, inherent in the whole thing.

And so here we are in Aotearoa a small remote mercantile nation whose economy relies on exporting. So when something hits the cooling device the buzz stuff, tourism, IT, movies et al are suddenly looking rather limp yes indeedy! And it is realised that the nation’s true reliance is actually the good old primary produce, and it always has been. Backbone of the country, what a wonderfully true cliche that is. So why then do we have a government and bureaucracy hell bent on regulating farmers and such like off their land!?????!!!!

What a silly comment.
Are you suggesting that NZ go back to being an agrarian economy?

Most IT people can work from home, actually.

Cough Cough ...Tech Sector ..(Xero) ..get in behind

Really useful summary, Terry. Thanks.

They are a clever lot, this coalition. As you point out, most of the tax measures (and in addition to the $25pw rise to benefits) are things that - in all fairness - should have been done when recommendations from relevant working groups came out. Collecting all these (largely) tidy up measures and labeling them a COVID-19 response is, well ... clever, if not a bit disingenuous.

But hey, better late than never and all very welcome as you say.

The biggie - rapidly rising unemployment - will be the one to watch.

Next I think we'll need mortgage relief, as the UK have announced;

Cynically I would say these are election policies bought forward because justifying them after COVID blasts through would be unacceptable to the electorate. By wrapping them up as Covid19 response, you get the applause for making your spending package look even bigger and maximum Twitter kudos for looking after the downtrodden ahead of the salary and wage earners who are facing huge levels of uncertainty.

"you get the applause for making your spending package look even bigger and maximum Twitter kudos for looking after the downtrodden ahead of the salary and wage earners who are facing huge levels of uncertainty."

Except of course, as a population group, the downtrodden don't really vote.

So as a vote winner, it wouldn't be sensible politics to throw wage earners under the bus in a time of massive uncertainty, which is why I think we can take the policy announcements largely at face value rather than a cynical political ploy (but one that certainly doesn't let a crisis go to waste, which is "good" politics).

Mortgage relief Kate, really? I trust that was a tongue in cheek comment alongside your cynical start to your reply. With mortgage rates at just over 3% and likely to drop further now that the OCR has been reduced to 0.25%, Mortgage owners will be paying a lot less than the renters. I was paying mortgages at 12 to 18% (admittedly a few years ago) and now I am a pensioner renting, my rent has increased over 30% in two years. The house that I'm renting has increased in value by over 25% and the only increase in costs to the owner has been the rates at 8% with no maintenance to speak of. It's not mortgage relief that's needed but rent relief.

too little too late -- and in the wrong places

500m for health only ? sorry wont even scratch the surface -- i manage healthcare company -- and already its been a massive cost in staff time managing this - putting our pandemic plans into place -- replacing staff who are on holiday and will have a two week standown period -- We wont qualify for much support because our income wont drop 30% - but our expenditure will certainly go up !

Also - a shit load of money for beneficiaries - not just now but forever -- who are least likely to be impacted - not like they will be loosing their jobs or businesses -- life will just trot on -- This is supposed to be targeting workers and business who are loosing their livelihoods - not those too bloody lazy to positively contribute to society
coalition in action -- green party happy - shitload to beneficiaries - NZ first - winter fuel to pensioners --

where was teh serious investment in health and infrastructure and opportunities to put those people who lose their jobs and businesses back into the workforce -

and all this talk about labours low debt ratio -- inherited from nationals fantastic managemetn of the GFC -- compared to the rest of the developed world -- i wonder if our fiscal position will be stronger after this in comparison - as it most certainly was after the GFC !

and all this talk about labours low debt ratio -- inherited from nationals fantastic managemetn of the GFC -- compared to the rest of the developed world -- i wonder if our fiscal position will be stronger after this in comparison - as it most certainly was after the GFC !

You'll actually find both this and the last Labour government ran lower debt and National had been running it up higher.

But the real problem has been the central banks blowing household debt bubbles.

Nice memory-holing of two massive earthquakes and their attendant fiscal costs in the 2010-2016 period, there, Komrad.

The "two massive earthquakes" is a bit of a red herring, Government debt effectively peaked just before the first CHCH earthquake.

Does the new commercial building depreciation mean that if you are a book a batch operator whose property attracts commercial rates you now get to depreciate the building? Would this not lead to more residential property being converted for commercial short term accomodation use?

Community spread WILL be happening NOW.

Do the math.

Let's assume the natural uncontrolled transmission rate an average of 1 person infecting 3 others every 6 days. (Hence leading to case doubling effectively every 3 days. ie 1 case on day 0, 4 cases on day 6, 16 cases on day 12 etc). If 1 mild case was infected on day 0 (arriving in NZ shortly after being infected. Then on day 6 there are 3 new infections, statistically likely also all to be mild (assume none of the mild cases get picked up as no direct connection to travel), then on day 12 we have 12 new infections (16 total) statistically 1 of these will be serious and therefore it will be the first community transmission to get picked up BUT it won't be picked up until day at least 12 days after that infection ie day 24, hence there will already be 16x4x4 (ie 2^8) which is 256 cases of which 51 will be serious.

This could potentially happen in several places at once, hence there might be 100-200 serious cases turning up in days of each other, probably about 24 days after the first unknown case. The likelihood of our first case of this kind of seeding was sometime in the past 10 days, so in 14 maybe longer (if incubation is towards the longer end for the initial cases) we will have 100 odd cases turning up.

This has happened in nearly every country so far. Look at the US: first case in Seattle Jan 24, obviously someone was infected in the community by this case but the first time it showed up was late Feb, testing was refused hence it went on for several more days with first community transmission not picked up until start of March (hence 36 days) so cases could have ballooned to as many as 4,000 by that date in Seattle alone. Hence by mid March these cases would only just being identified, with many being missed because of the lack of testing of mild cases so this is entirely consistent with the order of magnitude of the actual 1000 odd cases currently confirmed in Washington state.

NZ need to lock down NOW as by the time they react to the first community spread which is picked up, even more days will pass and 256 could turn to 1032 case and we will be exactly where Europe and USA were a few days ago.

We are pretty much screwed unless Ardern acts now. The experts know this, look how grim Prof Michael Baker looked on tv, they know this and say we must act now, only stupidity and fears of overreacting and financial cost considerations are stopping it, but the financial cost will only escalate the longer we wait. If action was taken 3 weeks ago, our economy would be ok, now with the facts fast coming out of Italy it looks like not just economic catastrophe but mass death is imminent.

Remember with the rate of uncontrolled infection we have 60 days from day 0 to full infection of the non-isolated. That means that given day 0 could be estimated at say March 1 in just 7 weeks we will see total catastrophe without mass interventions.

Why the hell did the stockmarket go up?

As a comparison Hawaii has 14 reported cases. Not sure but imagine Hawaii was in the frontline before NZ and of course much much heavier tourism and a lot of diversity too in the community. And it is that community spread that obviously worries them greatly as outside of the glamour tourist spots, things are pretty basic. But so far like NZ they are keeping it relatively flat lined. So hope rides eternal?

Best investment for NZ future? - get those hand out quickly! this is once in the life time opportunity to use it, buy more properties/service the current loan, leveraged your current loan payment into more loan borrowed from Banks to buy more properties - Do Not Worry for NZ? - the whole systems are geared up to protect RE industries, this is something that never been disclosed publicly.

Another relief for readers here, as comrade Xingmowang said.. NZ is one of the country shall benefit for the support towards China in difficult time recently, so the magnificent China shall help massively. With the help of mighty China economy, the world shall get unprecedented assistance to fight this Covid19 and slowly they shall reveal that.. 'it could be' this is a virus in the making by the USA, to disrupt China marching forward. The virus being injected silently into exotic animals (usually with fangs) that is a normal cultural heritage/century of tradition in China to be consumed. To USA.. we can only said.. wak yu, .. we no way helpin u.

Can anybody tell me if the NZ Super comes under the heading of 'Main Benefits' and therefore included in the $25 a week increase?