This article aims to assist with understanding how the COVID-19 Government Wage Subsidy should be returned and treated for tax purposes in the hands of a self-employed person.
Inland Revenue have confirmed the following tax treatment for the wage subsidy (and wage subsidy extension) for self-employed people.
- The wage subsidy qualifies under section CG 5B of the Income Tax Act 2007 as ‘compensation’ to replace lost income. This means the wage subsidy should be spread over a 12-week period in recognition of when it would have been earned had the self-employed person been able to operate as usual.
- The wage subsidy (when received by a self-employed person) is not liable for ACC under section 14 of the ACC Act 2001.
- There are no GST implications in relation to the wage subsidy (it is exempt from GST).
- The wage subsidy is taxable income to a self-employed person.
It is also vital to spread the wage subsidy, as returning this amount as a lump sum may result in unintended consequences with Workings for Families Tax Credits and Provisional Tax Obligations (among others).
Case Study
Joe Smith – Sole Trader of Joe’s Handyman Services North Canterbury
Joe applied for and received the full-time COVID-19 Wage Subsidy on 27th March 2020 as a self-employed person. Joe could not run his business over the lockdown as he was considered non-essential, and therefore had a 100% revenue drop for April 2020, when compared to April 2019. Joe does not employ anyone else in his business.
For the purposes of this article Joe has met the other required eligibility criteria to receive the COVID-19 Wage Subsidy.
Joe wants to know what information his BDO advisor will need to prepare his tax return.
- Joe should advise his accountant what day he applied for and received the wage subsidy. This is because Joe will need to return a portion of the wage subsidy for March 2020. The remainder of the subsidy will be returned in his tax return for the year ended 31 March 2021.
- Joe should advise the amount he received for the subsidy and confirm that he was eligible to receive it.
- Joe should confirm that he did not include the subsidy in his GST returns. If he included the wage subsidy in the return by mistake, his BDO advisor will be able to assist in correcting this with Inland Revenue.
- Joe’s accountant will complete a calculation for how much of the wage subsidy needs to be returned, and will ensure the income is not liable for ACC.
Joe will be required to pay tax on the wage subsidy at his marginal tax rate.
Joe had lots of bills over lockdown and spent all the subsidy he received. Joe thinks he can pay the tax on his 2020 income but is not sure if he will be able to save enough for the 2021 tax without some guidance.
Joe decides to contact his local BDO adviser to get some budgeting advice, and to discuss what payment options are available if he cannot pay his taxes on time.