Wage Subsidy – is it taxable and how do I account for it?
Employers and the self-employed appear to be getting to grips with the eligibility criteria to be met and how to go about claiming. If you need a reminder then visit the Work and Income website and review the details and definitions there.
We are receiving more and more questions about whether these amounts are taxable and how should they be accounted for in Xero?
It is important to note that employees will continue to receive their wages and these will be fully subject to PAYE. By making the claim the employer is committing to keep on paying wages for 12 weeks.
Therefore, the employer needs to continue to make the PAYE deductions and filings as required.
Employers should fully consider the terms of the Declaration before applying to receive the subsidy. Some businesses may well choose not to apply for the subsidy as they don’t wish to be subject to the requirements.
Inland Revenue has released advice on the taxable treatment of the wage subsidy and leave payment. The advice for employers is as follows:-
- 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.
What this suggests is that you should ensure that you do not return it for GST and it is, at least technically, not exposed to income tax either on receipt or on payment by the employer.
However, when received by self-employed taxpayers the receipt is characterised as taxable income by virtue of it being deemed a receipt in replacement of lost earnings. But it is still not subject to GST.
There are some useful examples offered by IR here.
How you account for something of this nature is a little less clear.
Technically, it should be recognised as a liability and subject to a journal against wages each pay cycle until exhausted in week 12. The cash should ideally be ring-fenced and reduced only when paid as part of wages to employees. Whether that is achievable in reality is questionable.
For the self-employed treatment is easy. The receipt should be reconciled to ‘other income’, just ensure that the GST treatment is set to ‘no GST’. If unsure, put it to Suspense and allow your accountant to deal with it.
Where the subsidy is received for staff wages I would suggest that the receipt is put to Suspense initially. Then with each pay run a journal will be required between Suspense and Wages for the amount of the subsidy used in that pay run.
Remember to keep records of what portion has been paid out to the employees in each pay cycle and what balance of subsidy remains to be paid. This is important as any unused subsidy may be subject to repayment should you fail to meet the eligibility criteria – for instance cessation, insolvency, termination or redundancy.
- The leave payment is not subject to GST. An order in Council is being drafted to
treat it as exempt (Section 5(6E)(B) (iii GST Act).
- The leave payment for self isolation paid to employees or self-employed persons
is subject to tax as it is paid to replace taxable income.
As of Friday, 27 March 2020, this is of less relevance as the Leave Payment scheme was rolled into the Wage Subsidy scheme.
I would imagine very few of you will have made a claim based upon the leave payment rules as these were for imposed self-isolation. Once the lock down became effective almost everyone will have been affected and most will have been eligible for the Wage Subsidy.
Stop Press!! This is a continually moving item and we shall make our best efforts to keep on top of the changes. If in doubt consult you HR advisor.
As of Friday, 27 March, a few other adjustments and clarifications started to be made.
Employer must pass on the full subsidy
The $585.80 or $350/week is now considered the minimum that must be paid to the employee. This aligns with the intention of getting money through to the waged workforce. Where the employee is normally paid more then the employer will be required to meet the difference for the 12 week period.
However, this was subsequently corrected over the weekend to clarify that where the employee would normally receive less than the subsidy then they would continue to receive that amount. The employee should not receive a wage increase by virtue of the subsidy.
I would suggest that this amount is considered as gross wages and subject to PAYE deductions.
The 80% of normal pay has been relaxed
Should the employer not be able to meet this threshold of pay for the employee they may still be eligible for the Wage Subsidy.
However, the employer must make their Best Endeavours to pay at least 80%. This may require a lot of review and documentation to prove that this bar has been met. We would urge caution.