COVID-19: Wage Subsidy and Leave Payments Explained
We have found that there is some confusion for business owners around the the tax treatment of the wage subsidy.
Tax treatment of the wage subsidy (the technical stuff):
- It is not subject to GST. An order in Council is currently being drafted to treat it as exempt (Section 5(6E)(B) (iii GST Act)
- The wage subsidy paid to the employer is not taxable. It is excluded income under Section CX 47 Income Tax Act
- It is not deductible when paid by the employer as part of wages to employees.
- It is taxable for the employee. It is included as part of their normal wages and subject to PAYE, Student Loan, Kiwisaver deductions
We are finding that most employers are aware that the Wage Subsidy received from WINZ is tax free. However a lot aren’t aware that they can’t claim the amount paid to staff as an expense (ie wages).
The real tax treatment is putting you into a neutral position. The income isn’t taxable however you can’t claim the wages (wage subsidy portion) as an expense.
Our next issue relates to the fact that we are at the end of the 2020 financial year and you have received a lump sum payment from WINZ which covers a 12 week period. This means you don’t have the expense to offset against the revenue.
At this stage there hasn’t been any direction from IRD as to how to account for this mismatch, legislation is forever evolving so the position may change.
We are recommending the following approach:
You will need to create several new codes in your accounting software:
- Wage Subsidy Received In Advance (current liability in balance sheet)
- Wage Subsidy Received (Other income in P&L)
- Wage Subsidy Paid (Expense in P&L)
Code the lump sum payment to Wage Subsidy Received (the balance sheet code). If you don’t undertake monthly reporting then this is all you need to do. When we prepare your annual accounts we will prepare the necessary journals to account for the wage subsidy.
If you are undertaking monthly reporting you will need to journal the used portion of the wage subsidy from the balance sheet onto the P&L.
PLEASE NOTE: If you have already followed advice and coded this transaction as ‘Other Income’ in your March P&L, that will be fine, but will need to be adjusted by your accountant at year end (which is now). What follows is ‘best practice’ that we would recommend if you haven’t yet entered the subsidy received.
Below is an example of a business with 20 full-time staff who pay wages weekly with a lump sum payment received on 27-3-20 $140,592 (20 x 585.8 x 12)
- $140,592 coded to Wages Subsidy Received in Advance (Balance Sheet code).
- First round of wages paid under lockdown rules on 30-3-20
- Wage expense coded to wages as per normal.
- Journal entered:
- Debit Wage Subsidy Received in Advance (BS) $11,716
- Credit Wage Subsidy Received (P&L) $11,716
- Debit Wage Subsidy Paid (P&L) $11,716
- Credit Wages (P&L) $11,716.
The above journal ensures that you are accounting for the wage subsidy in the correct accounting period (and financial year).
We realise these are tough times and complex situations to navigate. We are here to help you.
If you would like a helping hand please contact Ashley Trewin, Accounting Director.