Natural disasters and tax relief
22 February 2023
Twelve years ago, on 22 February 2011, Canterbury experienced a 6.3 magnitude earthquake that caused massive disruption. For tax consultants, this kick started an enormous tranche of activity at both an administrative and legislative level designed to help provide tax relief to impacted Kiwis.
At the time of the Canterbury earthquake, the pathway for dealing with natural disasters and tax compliance was a potted mix of rules that mainly applied to assist businesses with tax compliance. There was no model that could be pulled from the shelf and dusted off. Despite this, the Inland Revenue Department’s (IRD’s) administrative response in pressure cooker circumstances was first class and created a very good template for the issues we have endured with Cyclone Gabrielle.
Key IRD responses learned from the Canterbury earthquake
The administrative measures for the Canterbury earthquake included:
Establishing an 0800 Disaster Response line.
Sharing offices and information with other Government agencies.
Attending welfare centres.
Issuing letters to people advising on options for managing tax debts and outstanding returns.
Putting tax audits and disputes on hold.
An important part of the response was the reliance on IRD’s relationship with tax agents through the New Zealand Institute of Chartered Accountants to better enable the department to support businesses, including appointing dedicated liaison officers. This opened up channels that allowed a free flow of information and advice between accountancy practitioners and IRD, including the arrangement of a number of meetings between Canterbury practitioners and the most senior IRD staff.
On the legislative front, legislation was passed to give IRD the discretion to:
Remit use-of-money interest.
Grant extensions of any time limit.
Introduce rules to smooth out depreciation recovery income.
Remove Government wage subsidies and other assistance from income for working for families, student loans and community service cards purposes.
Relax the KiwiSaver hardship provisions to include property damage or destruction, loss of employment, and costs incurred because of the February earthquake.
Remove tax on allowances paid to people who were required to base themselves in Christchurch for the work required to rebuild the city.
IRD responses we can expect to see with Cyclone Gabrielle
In response to Cyclone Gabrielle, the Government has introduced tax relief from penalties and use of money interest as well as extensions to any dates for filing income tax and GST returns.
Income equalisation for farmers, foresters and horticulturalists should allow late deposits and early withdrawals as was done for the heavy rain in Northland and Auckland in January 2023. This is all reasonably standard stuff that we have come to expect in natural disaster events.
However, as with the Canterbury earthquake, we are expecting to see rules introduced that will ensure any assistance, such as wage subsidies, are removed from income for the purposes of determining working for families’ tax credits and student loans. We also expect that the hardship rules for KiwiSaver will be relaxed and hope the Government will allow the payment of outstanding tax or GST in instalments for impacted taxpayers.
It’s likely that insurance recovery timing rules for depreciable assets destroyed by the cyclone will be switched back on. These rules were all designed to ensure the timing of insurance recoveries for tax purposes were not recognised until the proceeds were received or could be reliably estimated. The rules also limit the amount of any depreciation recovery income to the amount of depreciation deductions previously taken and provided roll-over relief for the situations when assets were replaced.
Other anticipated measures include rules that allow businesses that have been forced to cease trading by the event to continue to get tax deductions for any on-going expenses they incur and a tax exemption for allowances for staff who are required to relocate to affected areas to work.
Additional tax relief measures we are hoping to see implemented
There is further opportunity for the Government to assist Kiwis impacted by Cyclone Gabrielle. We would like to see additional tax relief provided in the form of:
Rules introduced to switch off tax on the value of employer provided accommodation for cases when an employer choose to provide accommodation to affected workers.
An exemption from tax and Fringe Benefits Tax (FBT) for any allowances and non-cash benefits paid respectively to assist workers in this time of need.
Loss carry-back rules used during COVID-19 to provide tax refunds on prior year’s tax paid.
The GST filing period changed to one month to provide earlier GST refunds.
Higher depreciation allowances for plant and equipment purchased to replace plant and equipment irreparably damaged.
Removal of the capital limitation on expenditure on land remediation or adding this expenditure to the list of amortisable expenditure.
Rules switched on to remove the tax impost to the donor on trading stock donations.
With the Canterbury earthquake response template available as a good starting reference, we hope the Government will implement most, if not all, of these changes relatively promptly. The quicker they do; the quicker impacted Kiwis will be able to fully understand what to expect as they recover and rebuild from Cyclone Gabrielle.
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