COVID-19 wage subsidy: tax consequences

The Government’s 12-week wage subsidy (available for both employees and the self-employed) is paid in one lump sum to the employer.

The tax treatment for the employer is as follows:

• the lump sum is excluded income
• no GST applies to the lump sum receipt
• when the payment is passed on to employees (either in one lump sum or spaced out so that it is paid as part of the employee’s usual wage payment cycle) no deduction can be claimed
• PAYE must be deducted.

The tax treatment for the employee is as follows:

• the payment is taxable remuneration and subject to PAYE, ACC levies, KiwiSaver contributions and student loan repayments at the date of payment.

The payment is also a taxable receipt for the self-employed, shareholder-employees, partners in a partnership and sole traders.

If the wage subsidy is being paid in one lump sum (or other than according to the employee’s usual pay cycle) this should be discussed with the employee, as adverse tax consequences could result. For example, if the payment was made in one lump sum before 1 April 2020, this could push the employee into a higher tax bracket and/or could affect their eligibility to receive family tax credits and other entitlements.

References:

Income Tax Act 2007, ss CX 47, DF 1.
Goods and Services Tax Act ss 5(6D), 5(6E), 89

Goods and Services Tax (Grants and Subsidies) Amendment Order 2020

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