First up and most importantly, here is the video recording link from our first ever Covid-19 webinar which was on Tuesday (there will be another focussing on the Budget next Tuesday at 11am, mark your diaries!)
The first webinar discussed the top four Covid-19 issues, if you missed it or want a recap it’s all between the 1m-40m marks!
We will up the Audience for the next one to 250, but get in quick they are free and popular.
Do not borrow any money until you watch the section on lending!
Link is here: Covid-19: It’s Business Time
Additionally Matt Stringer, one of our Senior Associates, has been busy behind the camera putting together some quick videos explaining the key details behind some of the new schemes to kick start our economy. Click on the following headings to take a look:
Budget 2020 this Thursday 14 May at 2pm don’t miss it! (hold off any big calls until you hear it)
Finance Minister Grant Robertson Initial February 2020 press release before Covid -19 changed it all read:
“This year’s Budget will continue the Coalition Government’s focus on tackling the long-term challenges facing New Zealand while also preparing the economy for the future.
“Those challenges and opportunities cannot be resolved in one budget, so they continue to be the core of the priorities in the 2020 Wellbeing Budget,” Grant Robertson says.
The Budget 2020 priorities are:
Jacal thinks maybe… ish for the 2020 Budget (some are announced already), we will have headlines late Thursday for you.
NZTE – Cash Grant Funding for some of your professional fees, see Vol 8 for full details but contact a Jacal team member if you are interested!
There is only 25 Million and its going fast so register for it at least, Hurry up!
Important after Registration
To make use of the IRD temporary-loss-carry-back-scheme (to get tax paid back!), contact us we will help, see notes at the links also
Winston Peters gets his five minutes of fame and announces a $72.5m racing industry package (way over due, by nearly a decade!)
Back to Business Time Covid-19 Style Level 2
JACAL will be reopening for Level 2, As always, we’re here to support you.
The JACAL offices will reopen for Level 2 with the safety of our team and visitors as our main concern, as a reminder;
Do everything you can to reduce the risk of COVID-19 transmission at work — we all have a part to play in keeping each other safe.
Foreign Exchange 2020 Year End – Heads up if you have FX accounts consider! (Katrina Scorrar Jacal Senior Tax Manager)
The IRD administered Small Business loans SBLS:(thanks DOT) Long But important if you are taking the cash…
More detail on it here for basic terms: https://www.ird.govt.nz/covid-19/business-and-organisations/small-business-cash-flow-loan
According to the IRD the following must be satisfied:
1. The business or organisation must be viable now, and it must have a plan to ensure it remains viable;
In the IRD’s view this generally means the directors or owners must have good reasons to believe it is more likely than not that it will be able to pay its debts as they fall due (i.e. remain solvent) within the next 18 months.
Some key points:
(a) “More likely than not” = anything more than 50% chance;
(b) Pay debts as they fall due – same as the test in the Companies Act in terms of solvency for company distributions;
(c) 18 month timeframe over which to consider these factors.
To asses this we can help you put together a plan to validate this and assess the risks for, i.e. 12 month plan with cash flow and Budgets/Forecasts.
2. The client’s accountant “may be able to provide this advice”, basically come to us and we will review and cover it with you and if there is trouble down the road you can say you sought professional advice!
3. Evidence supporting the contention of viability of the business needs to be kept as audits of applications may take place any time later, just do this at the time and file it.
4. Evidence might include:
a. Cash flow forecasts
b. A plan of where future revenues will be derived from, based on forecasted market conditions
c. Financial statements showing the business should have enough resources to be able to sustain itself once the applied for loan is taken into account
d. An accountant’s assessment that the business is viable and ongoing.
5. You need it do the homework before taking this loan or any other, don’t just snatch at money, its real debt and this is debt with IRD, and they have an extra ordinary amount more power to recover from you and enforce than a bank does and banks have plenty!
6. If you are borrowing money to pay the landlord, suppliers, creditors, is the debt going to put you into a pattern you can work your way out of or are you just kicking the can down the road? Talk to everyone you deal with about credit terms before taking debt.
7. In addition to helping you getting the plan together, preparing supporting information and forecasts, we can also provide a view on the viability of your business and the risk of taking the SBLS Loan, this will support your decision around applying for an SBLS loan and drawing it down.
8. further detail was released yesterday on how this scheme works, specifically the terms and conditions of the loans. There’s a few interesting aspects to the Ts & Cs so feel free to read them. My noted aspects are set out below:
a. Joint and several liability for partners of partnerships, parties to unincorporated joint ventures, and trustees of a trust that borrows under the scheme. This continues even if you cease to be a partners of joint venture or trustee;
b. In the event of any default the interest charged is at a default rate, which is the UOMI rate plus 3%. So that would make it 10% interest as of today, which is not cheap money! So clients need to be pretty sure they will be able to meet their obligations;
c. The loan is supposed to fund fixed and operating costs – e.g paying suppliers, paying rent and rates and insurance etc. Therefore think twice or thrice if it is intended to refinance existing debt, pay for new equipment, fund shareholder salaries etc. The applicant must make a declaration as to their use of the borrowed funds as part of the application process. Not abiding by this is a default event and triggers the default interest rate and probably repayment obligations;
d. If it’s not fully repaid within 12 months there is interest charged on the loan for the full term – that is if it is not fully repaid within 12 months there is no interest free period. So when people say ‘its interest free for 12 months’, that’s not actually correct;
e. This is not a revolving credit facility – repaid amounts can’t be re-borrowed. You get to make one loan application and that’s it.
Managing risks attached to having taken the COVID-19 wage subsidy payment
The Government has consistently said all amounts paid out under this “high trust” scheme will be audited with enforcement activity targeting businesses which were not eligible for support and employers who fail to meet their obligations to employees under the scheme.
Whether the stated level of scrutiny will actually be achieved is questionable given the sheer scale of the scheme. Notwithstanding that, what has become increasingly clear is the growing interest in who has received wage subsidies, how they have used that money and the consequences that will be visited upon the unentitled and other outliers. IRD/MSD reportedly has a team of 100 auditors looking at subsidy payments and detailed enquiries have begun for the first tranche of businesses to attract scrutiny. There will be a huge amount of work in this space over the weeks and months (if not years) ahead.
What are the main risks?
The issues we have encountered with this scheme are often complex at the margins. Not only is the scheme itself unprecedented but the swiftly changing nature of the rules, the lack of detail and depth for those rules and the paucity of guidance from officials have all combined to present far more uncertainty than we would like.
Some businesses will have got it wrong, even if they acted in good faith. Others will fear they got it wrong when they did not. No matter where claimants sit on the spectrum, all of them should prepare for the enquiries which are likely to come.
Given the underlying purpose of this scheme and the tenor of various statements by senior politicians and officials since we moved into lockdown, we think the main risks for clawback of some or all of the subsidies fall under two broad headings:
The focus here will be on whether businesses actually suffered a 30% revenue loss in comparable Month or 30 day period to the extent required. In other words, how did a business determine its eligibility and was that decision reasonable in the circumstances? Note this is an in or out Revenue test, it’s about revenue only, not profits or losses.
There are particular risks for those who claimed on the basis of anticipated revenue losses. Claimants who adopted ‘non-standard’ comparative measures because they are start-ups or were anticipating high growth or had other dynamics affecting their business also face greater evidential challenges than established businesses with settled trading patterns. If it transpires that a business “missed the mark” it will be very important to show why that is so. If you have been trading for less than one year you can claim the subsidy by comparing your position in the Covid-19 timeframe, with another 30 day period/month in the past year, but you need to have valid reasons for the rational you are taking.
2. Not using subsidy proceeds to pay employees
Every subsidy dollar must be used to pay employee wages, weather that is at 80% or otherwise, your wage payments for the period at a minimum must match the subsidy taken, that is to say you cannot (tax inclusive) pay less in wages that the value of the subsidy received. Misapplication of scheme money also triggers repayment obligations for an employer.
There are known difficulties around calculating “normal” earnings for some employees (eg seasonal or casual workers and employees whose remuneration includes commissions). Special care is also needed to ensure that owners who work in their business return their share of the subsidies if they do not ordinarily receive PAYE income from that business. Poor cash flow management or other financial pressures may also have seen some businesses pay other stakeholders first, to the (actual or perceived) detriment of their employees.
Consequently clear, unambiguous accounting for all wage subsidy receipts and payments will be critical.
How should risks be managed?
Retrospectively creating information is always an unwise strategy. Material gaps will appear where they would not have if more care and attention had been invested now while it is still current and active and you are involved in the process. This is particularly so with nuanced or subjective information that was used to make a decision and may be difficult to recall with the passing of time. Hard data and soft data will likely have equal value in the final analysis.
Front-ending the record gathering process will not only ensure that businesses capture all of the quantitative and contextual information they will need to resolve any regulatory enquiries more easily, this approach will always be more cost-effective on an end-to-end basis.
WHAT CLIENTS NEED TO DO, WITH OUR HELP AS REQUIRED
The best advice is for claimants to put clear records in place now showing:
1. The “gross revenue” calculations used to justify their application – including financial forecasts and related information for anticipated revenue decreases.
2. How each employee’s entitlement was determined. This is relevant not just for the level of subsidy paid by MSD (fulltime vs part-time) but also helps to show how an employee’s “normal earnings” were calculated for the purpose of paying subsidised wages.
3. Nominated employees were eligible to be subsidised (ie they were working here legally) and they agreed to being included in a subsidy application.
4. A summary of the “active steps” taken to mitigate the pandemic’s effect on the business.
5. A summary of how these records came together at the time they made their claim(s) under the scheme. Build a narrative around what the hard data was saying and explain other contextual factors that fed into overall decision-making. This will help to show a claimant acted in good faith at that time. It will also clarify what obligations the employer has. March 27 is the pivotal date here: see the two different declarations here:
Declaration – COVID-19 Wage Subsidy Scheme
This declaration applies to you if you applied for the COVID-19 Wage Subsidy on or after 4pm on 27 March 2020.
Declaration – COVID-19 Wage Subsidy
This declaration applies to you if you applied for the COVID-19 Wage Subsidy before 4pm on 27 March 2020.
6. All business-related insurance receipts since 1 January 2020. Because compensation from insurers for business interruption claims related to COVID-19 can influence the extent to which wage subsidies may need to be repaid, it will be important to remove all doubt around insurance receipts of any kind over the months ahead.
7. Payroll and accounting records from the date the subsidy was received to the date all proceeds were paid to employees. Be mindful that the subsidy period currently runs to 9 June 2020 and that it has always been possible to distribute subsidies to staff in a single payment.
8. A summary of the “best endeavours” the business has made and is continuing to make to retain subsidised employees, and to pay them 80% or more of their ordinary remuneration during the subsidy period.
We also recommend that all claimants implement a process to:
Given that there is only 4 weeks left in the initial subsidy period and that we don’t yet know what the next round of business support will look like (Budget) , please get this together now, and we will review it with you and if required store it with our tax records.
If you have think you are marginal in claiming it, have tricky issues or documentation to resolve please discuss this with us ASAP.
Politics at the expense of SMEs By Mr Mark Davies Director of Tax
Political capital and the SME death toll
Warning: Some people might not like what they are about to read. But I strongly believe SMEs and their owners have been let down by the government of late, in the interests of political egotism and self-interest. I note the views expressed are my own personal ones. If you agree with them I would encourage you to share them, and make them known to your local parliamentary representative, of whatever political persuasion they might be. This is not a meant to be a political commentary but rather an expression of concern for many business owners who are part of the fabric of our economy and community.
We have heard, and will continue to hear, statistic after statistic re the COVID situation. However, I doubt we will ever hear the statistic of how many businesses are dying each day due to the government politicians focusing on building their own political capital over saving SMEs and their owners’ and families’ livelihoods.
Given all the puppy dog eyes and daily public hand-wringing (electoral campaigning?) we’ve been bombarded with in recent weeks, it beggars belief that the government is acting as if thinks it is better to drop hints, drip feed, and tell us to ‘wait until the budget’ for announcements concerning what it plans to do to help SMEs and business more generally.
The wage subsidy was a sensible idea which has clearly helped keep some employees in work, and probably keep some businesses alive for the time being. However, it was essentially about the employees, and not the business owners (business owners are probably not typical labour voters, if you’ll forgive a bit of a generalisation). It was only in the last couple of weeks that businesses really started to hear what the government is prepared to put on the table for them. Those measures are mainly limited to:
(a) the much vaunted loss carry back rules (which in my view are going to have fairly narrow application due to only allowing a one year carry back, and also the absurd way in which shareholder salaries are going to be factored in, or rather not factored in); and
(b) last week’s apparently unintended announcement of its ‘small business loan scheme’.
Yes that’s right – we hear, almost unbelievably, that this latter announcement was unintentional. The implication is of course that the government thought it better to wait, delay the potential cash flow benefits to those who might be able to make use of the scheme, and instead announce it later (perhaps with a bit more hoopla around it, and a few more cameras present for the associated photo opportunity?).
The fact is business has to date largely missed out in terms of the government’s response. That is not good enough. As much as Labour doesn’t like the “rich pricks” (thanks Michael Cullen) and wealth creators, we all actually need them now more than ever. Apparently though, if we can wait we are going to hear more come Budget time. That also is not good enough. For some that will simply be too late, and for some it is already too late.
The Budget is not the place to be announcing COVID-related measures or relief. There is no reason for the government to delay such announcements. Every day the government puts business on hold means more businesses perish for good. The toll – financial and emotional – on the owners, employees, ‘bubble’ members and family, and ultimately our communities is already a terrible thing, and it will get worse. But apparently not terrible enough to override the desire of some of our ‘leaders’ to make political capital for their own personal gain! I guess it is election year after all.
Mr Mark Davies Director of Tax and all things GOOD!
Disclaimer – While all care has been taken, Johnston Associates Chartered Accountants Ltd and its staff accept no liability for the content of this newsletter; always see your professional advisor before taking any action that you are unsure about.