Question :
As a sole trader, my lump sum wage subsidy is treated as “other income” in a tax return rather than as wages/PAYE. I have just been advised by IRD in writing that because I received it in March it must be declared as income in the 2019/20 tax year. As background I applied for this based on a projected significant downturn in business from April onwards. I applied on 24 March and it was paid to me on 27 March. This treatment seems very onerous on sole traders. If I had known I would have waited until April to apply as this extra tax would have been far easier to deal with if it was apportioned over the 12 weeks it represents or from 1 April 2020. I wonder whether this income tax timing issue which seems to be an ‘unintended consequence’ for sole traders in particular can be challenged or whether anyone has advice on this?

Question submitted 03/04/20 @ 04:10pm
Industry: COVID-19 Funding & Support
  • Hey John, there are a number of un-intended consequences happening in a time like this – let me see what others think about this, and then we can see where that takes us and if we can find a solution. Andy

    Hi John, firstly, the outcome you’ve described is, unfortunately, correct.
    With regard to the impact on your FY20 tax payments, are you a provisional taxpayer? If so, presumably the provisional tax you have already paid will meet a good proportion of your FY20 liability and you will have a final instalment due on 7 May. In connection with this payment, the IRD has advised that it will write-off penalties and interest in late payments. It doesn’t remove the obligation, but it does mean you can defer payment. No time is specified, but you might perhaps take it to the end of the 12 week subsidy period? If you are not a provisional taxpayer, the additional tax will flow through to your terminal tax payment due on 7 July (or 7 April next year if you have a tax agent). At this stage it is not clear if the IRDs willingness to write-off penalties and interest will extent to payments due in July. One hopes things have improved by then… The double whammy is that, if you are a provisional taxpayer, your payments for FY21 will prima facile increase also, but you can estimate down so you only pay based on expected taxable income. All the best.

    Hi Andy and Darren,

    Thanks for your replies and advice. I am a provisional tax payer – twice yearly. With 100% reduction in business it’s going to be a challenge to meet the next payment combined with the increased and unexpected tax for this recent F/Y. This I will negotiate with the IRD and I do note the willingness to write off interest and payments.

    My key point, though, is that sole traders seem to be given no choice. Whereas Employers who received the lump sum before March can choose to pay employees over a number of pay periods to spread the tax burden on those employees. This is from business.govt.nz covid-19 news page: “Employers can pay their employees as per their usual pay cycles, or at other intervals as agreed with the employee. Employers must discuss any likely changes to wage payment intervals with employees, as these may have adverse tax implications for employees.” The same page has no advice for sole traders on tax.

    It also seems very arbitrary: another sole trader who applied on the same day as me in March, but for whatever reason had a delayed payment that didn’t arrive until 1 April will be fine.

    For me and for other sole traders caught in this, this may tip us into a higher tax bracket – so we will likely pay more tax on this subsidy. Also ACC bills – which this year will be based on actual income will also be higher. So there are broader implications.

    As you can imagine – if I’d known any of this I would have waited five days before I applied. However in the stress of that week and with the encouragement to apply for ‘predicted’ loss of earnings, I went ahead.

    I’m very grateful for the support from the Government, however this tax timing issue seems to be biased, arbitrary and unfair for sole traders – I really don’t believe the Government would have intended this.

    In highlighting it on this forum I’m hoping that somehow this issue comes to the attention of someone who can influence the way this is treated within the IRD. I’m not sure anyone is setting out the issues for Sole Traders in all of this as all the attention seems to be on the larger employers. So thanks again for reading and responding.

    Hey John, I sought some guidance from the IRD on your point – this is what they have said back to me, and they will also post this onto their website for guidance with an example: “We have determined that it is compensation in terms of section CG 5B of Income Tax Act which clarifies common law principle that business taxpayers return income on an accrual basis not on a cash received basis. We have taken an easy to follow approach for the self-employed that allows them to apportion it over the 12 week period. So subsidy was received on 26 March then 6/84ths of payment would be returned in 2020 and balance in 2021. We have prepared an example of this for website which will hopefully be posted soon.”

    I hope that is more helpful. Andy

    Hi Andy,
    Thanks for that. I separately found some advice today on page 38 of a 40 page covid 19 q&a document for tax agents the IRD prepared on 3 April (and which is on their webiste) that clearly states more specifically that “the income (for self-employed or sole traders) qualifies as ‘compensation’ for the purpose of section CG 5B and can therefore be returned in the income year which the income being replaced would have been derived. In practical terms this means an amount received prior to 31 March 2020 can be spread if it relates to income that would have been dervied after 31 March (the 2021 year).” That’s a direct quote. In this regard, for me as the decline is forecast for April none of it needs to be apportioned for March. It can all be apportioned from April. But even a three day apportionment for the 2019/20 tax year is a far better outcome. This is a great relief and I’m glad the IRD have changed their initial position – as sent to me in writing. It makes far more sense and is much more equitable. I realise the speed of all of this has left a lot of institutions catching up on all the implications for each business type, so it’s great to see some quick movement on this as it reduces the stress and allows us to plan. Thanks again for all your help and for continuing to follow this up.

    Hey John – thanks for following up, and sharing, this means others can benefit something from this – and I am pleased sense prevailed. Keep well. Andy

  • You must be logged in to reply to this topic.