After frustration with the New Zealand banks who have been dragging the chain in regard to extending loans to small businesses, Inland Revenue has been directed to fill the gap. And it has all happened by accident.
Loans of up to $100,000 will be available, interest-free, for businesses suffering as a result of the Covid-19 outbreak.
Unlike the other areas of New Zealand business assistance, we haven’t been able to prepare this post prior to the announcement because it wasn’t actually meant to happen.
New Zealand is able to pass legislation quickly and has been using that to good effect. However, in this case it has resulted in the wrong piece of legislation being introduced and that legislation being passed within hours.
The result is that the New Zealand government has become what it said just a few weeks ago it would not. It has legislated itself into becoming a lender which is something they announced a month ago would not happen.
This type of legislation would normally take 6 months before it became law. In this case, the legislation that was actually introduced to Parliament was not the same as that distributed to parliamentarians for consideration beforehand.
However it is now law and here are the details.
The loans will be available for 12 months and will be available to New Zealand businesses who have fewer than 50 full-time employees. The fact that the loans will be provided by Inland Revenue ensures that the grants will not be taxable. It also makes it possible for Inland Revenue to forgive or write off the loans in the future without giving rise to any income tax considerations which can result from a taxpayer being relieved of paying a loan.
The loan scheme can provide $10,000 to every business and a further $1,800 per full-time employee. That means that if the New Zealand business has 3 full-time equivalent workers, it could receive $15,400. This is calculated at $10,000 being the base amount and a further $5,400 for the 3 employees.
If the loans are paid back within a year they will be interest-free.
However, there will be no requirement to make any loan payments whatsoever within the first 2 years. If the loans aren’t paid within a year they will be subject to interest charged at 3% and the loan needs to be repaid within 5 years.
The expectation is that the loans will assist businesses to remain solvent and to be able to cover their overheads. Treasury indications suggest that the loan could potentially result in $2.5 billion worth of loans being available to sole traders alone. The fact that the business loans will also be available to New Zealand employers with less than 50 staff suggest that the actual costs will be much higher.
The Loans Can Not Be Passed Through To Shareholders Or Business Owners.
It might be timely to mention that Inland Revenue’s new systems are quite sophisticated and that any penalties that apply in New Zealand are enforceable against Directors living in Australia. So it’s important to ensure you meet the criteria to apply, and ensure sums are not paid out to owners or related parties other than required under contract.
The conditions that apply to these loans are the same that apply to the wage subsidies that are also available to New Zealand businesses adversely impacted by the Coronavirus outbreak. You can read more about NZ wage subsidies (and the conditions and criteria which also apply to these loans) in our article, All You Need To Know About The New Zealand Wage Subsidies
Businesses will need to show at least 30% reduction in revenue, and that reduction is a direct consequence of the Covid-19 situation. The loans cannot be used to support businesses that were already struggling prior to the Covid–19 outbreak.
Therefore, business owners who apply for these loans will need to ensure they have records prior to 14 February 2020 to demonstrate the reduction of income was a direct consequence of the Coronavirus outbreak or the lockdown that resulted.
Applications for the loan can be made through Inland Revenue from 12 May 2020.
The information in this article is indicative of NZ tax rules and changes and not intended to be complete for all intents or purposes and does not constitute advice. It is recommended that you obtain professional advice, suited to your particular circumstances, from us before acting on anything you read.