COVID-19 Wage Subsidy Income Spreading

Here is another commonly asked question #3

Can we pass the full 12-week lump sum subsidy amounts straight to the employees? Answer: There are some tax consequences that we need to consider as well as the intention the subsidy is trying to achieve. We explore them below;

For employers, the subsidy is non-assessable income and non-deductible expense for income tax purposes. Therefore, in that aspect, there is no effect. For employees, however, the subsidy paid to them is treated as wages, so it is taxable income in their hands. If the full amount of the subsidy is passed to the employees in one lump sum, rather than at normal pay cycles, then it has tax consequences for the affected employee, namely;

- It brings forward 12 weeks of income, which most would have been earned in the next financial year, into the March 2020 financial year. - This higher income will push the employee into higher marginal tax bracket, resulting in them receiving a tax bill at the end of the financial year. For most taxpayers without tax agent with valid extension of time, this extra tax will be payable 7 February the following year eg 31 March 2020 return will be due for filing at the IRD by 7th July 2020 and payment of tax due on 7th February 2021. - Another consequence of paying the 12-week subsidy as lump sum rather than pay through their normal pay cycle is the additional income may push them above the $48,000 income threshold which will mean they will cease to qualify for Independent Earner Tax Credits. - Other tax consequences include impacting their Working for Families Tax Credit, Child Support, Paid Parental Leave Entitlements, and may result in getting a student loan bill at the end.

The intention of the subsidy has always been to pay it out to the employees through their normal pay cycles. We believe, the amounts received by both sole traders and/or contractors should be apportioned between the two tax years, as it is the correct accounting treatment, with the unearned portion treated as a current liability until the income is earned. Should you require help, please contact us direct.

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Photo by Robert Bogdan (Pexel)

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