Business Support, Tax Changes and Covid-19

18 March 2020

< back to Knowledge Library

It seems like every second email is a newsletter from a business setting out what they're doing to deal with Covid-19. Don't worry, we're not going into that.

We also don't want to shout that the world is going to end. However, we do need to think about what's going on in the economy, how you could respond, and the practical elements of the Government's support package.

This isn't about making rushed decisions to change your business. It's about understanding what the next period could look like, and coming up with a plan to get through.

The short version

• Think about the impact on your turnover (how will your industry be affected)
• Then work out how you can respond (pricing, costs, balance sheet management)
• Get your bank onside and get the right banking facilities
• Consider Government support for staff in isolation
• Look at Government support for a reduction in your turn-over
• Delay asset purchases until April (for purchases between $500 and $5,000)
• Talk to the IRD about repayment options
• Get personal support if you need it.

It's about coming up with a Business Continuity Plan for your business to keep things ticking over during this uncertain period.

The disclaimer to this is that everything is very new. We've prepared this to the best of our knowledge, but things are changing quickly. If there's anything you want more information on then please let us know.

What we're thinking about

Ultimately the game has changed for the next period of time. This means a significant impact on turnover for many businesses.

Some of the industries which will be impacted are obvious. Think tourism (with borders closed), retail (fewer people out shopping), and hospitality (few people out eating and drinking).

There will be flow on for many other industries - think hairdressing (if people feel like cash is tight they de-prioritise personal care), lawyers (people will be less likely to buy/sell property), and mechanics (vehicle repairs will be delayed where possible).

In general, we would expect to see an overall decrease in spending, across every industry.

This decrease has two flow-on effects. Firstly, it reduces your gross profit. The reduction in gross profit can be mitigated by you buying less, and (to the extent you need to) managing staffing levels. Support is available from the Government - keep reading...

Secondly, you need gross profit to cover your operating costs. So it becomes a question of managing outgoings to make the gross profit go further.

How you could respond

Your options for responding become to:
• Change pricing strategies
• Reduce costs (both cost of sales and operating costs)
• Manage your Balance Sheet (don't worry - keep reading and we'll explain what this means)

Pricing Strategies
Some consumers have additional cash to spend through the Government support package. Others will change where they spend their cash. Does that give your business an opportunity to capture more of their (potentially) limited spend?

Discounting could be an option to attract more customers (make sure you understand the impact of discounting though - read more here). Alternatively increasing your prices mitigate against the reduced customer numbers. Ultimately though it comes down to you working out what the changed business environment means for your business.

Reduce Costs
Then, look at your overhead structure. Some areas might require more spending on (for example advertising), others require cuts (stock purchases). It's about identifying what you can cut, when you should cut, and what the criteria would be for you to spend at usual levels.

Balance Sheet
Then think about your Balance Sheet. Here we're talking about what you owe people, and what people owe you. Chase your debtors (people who owe you money), and chase them hard. It's important you get your hands on your cash to get through this period. Run your stock down to minimum levels - convert stock (or half finished jobs if you sell time) into cash.

It comes down to managing your working capital cycle, and then making your cash spin quicker. Checkout our recent podcasts on the Cash-flow Cycle and Spinning your Cash for more details.

With the people you owe (think IRD, the bank, your suppliers, you as shareholder of the business), talk to them early, manage payments, and think about accessing additional facilities to keep your business moving.

Banking support


Ultimately, some businesses will struggle to stay afloat. They may struggle to make existing loan repayments, or will require more lending to keep trading. Some businesses may have owners who struggle to make personal lending payments.

To be clear, there is no shame in this. It is more common than you may think, and is something which occurs with every economic shock (think global financial crisis).

Banks are open to discussing support. Especially if you talk to them early and present an accurate picture of where you're at.

In our experience, banks are more open to saying "yes" if you can:
• Present clear financials on where you're at today
• Explain a picture of what you think you'll need
• Show a clear forecast of what you'll be spending your money on

Ultimately, we're talking a solid budget, backed by a clear cash-flow forecast (remember - the profit shown on your budget is different to your cash).

Government support

For business, including self employed and contractors, the main Government support comes in the form of:
1. Wage support for staff in isolation
2. Wage support for businesses with reduced turnover

Staff in Isolation
This is available to all staff, self-employed, and contractors who need to self-isolate, are infected, or are caring for those who are isolating or are infected.

It only applies where any existing leave entitlements are exhausted and the employee can't be paid as usual (so if they're infected and sick leave is already used up).

There are some fishhooks though:

• The employee must register with Healthline
• You are not covered if you leave NZ from 16 March
• It only covers sick leave from 17 March onward (you're not covered for leave prior to today's announcement)
• The employee must unable to work from home

The employer must pass the payment onto the employee when received.
The amount of the payment is $585.80 per week for full time employees, or $350.00 per week for part time employees.

Please contact us if you would like to apply for this so we can talk you through the process.

Reduced Turnover
If your turnover has reduced by 30%, then you're entitled to wage support for each of your employees. This is designed to help you avoid laying off staff as a result of the reduced turnover.

All businesses should consider applying for this subsidy.

The application needs to be based off you having a reduction in turnover of at least 30% from January 2020 to July 2020 on a month to month basis.

So, if your January 2019 turnover was $100,000, and your January 2020 turnover was $70,000 you'd be entitled to the subsidy.

It can be based off actual turnover numbers, or your forecast for the coming months. Please let us know if you'd like to put a forecast together to access the subsidy sooner rather than later.

You'd then receive a lump sum amount per employee.

It's important to note that:

• You must keep your employees at a minimum of 80% of their income for the period of the subsidy (effectively keep everyone at a four day working week)
• You must actively manage the impact of Covid-19 on your business (for example by engaging with your accountant!)

You'll be entitled to $585.80 per week for full time employees, or $350.00 per week for part time employees. The amount will be paid as a lump sum once your application is processed. The amount you can received is capped at $150,000.

Applications can be made from today for the next 12 weeks.

As with the grant for staff in isolation, please contact us prior to applying.

Tax changes

Today's announcement saw the introduction of tax changes (some temporary, some permanent). These changes include:

• The value for low value assets has been increased to $5,000 for the 2021 financial year (not for this financial year). This means assets worth less than $5,000 can be written off immediately, rather than being treated as an asset (the current threshold is $500).

We recommend holding off asset purchases worth $500 to $5,000 until April to take advantage of the new rule. For the 2022 and subsequent years, the threshold will be $1,000.

• The reintroduction of depreciation on commercial properties, at 2% per annum on a diminishing value basis. This is a permanent change and applies for the 2021 financial year (again, not this tax year).

We will address this with customers as part of preparing your 2021 Tax Return (and factor into tax payments).

• Interest charges for late payment of tax can be written off for two years on all payments made from 14 February onward. You must who that your inability to pay tax was a result of the Covid-19 outbreak.

As with talking to the bank, if you're unable to make a tax payment we always recommend that you talk to the IRD as quickly as possible. They're (mostly) a reasonable bunch and if dealt with properly generally say "yes".

• The threshold for paying provisional tax has been increased from $2,500 to $5,000 per annum. Again with effect from the 2021 financial year.

Please contact us if you would like more information on any of these tax changes.

Personal support

We've spoken with many business owners over the last few days and see a growing need for support in the business community.

If you are struggling, we recommend the Xero Assistance Program. This provides face-to-face, telephone, live chat and online counselling, as well as key resources, all paid for by Xero. Please click here to find out more.

Otherwise, please reach out to us. We know your financial position, and we know what it's like so please reach out.

What we're doing

Now internally, we're doing exactly the same as other businesses - being sensible and washing our hands. So, we'll try and keep you safe if you need to come into the office. That said, if you would rather meet via Skype or Zoom just let us know.

We're also re-crafting our own budgets and cash-flow forecasts. These then feed into our Business Continuity Planning (let us know if you'd like more information on what this looks like).

Ultimately we're doing the same things for our business as we'd recommend to you and your business. If you need a hand in creating a plan for your business, or have any questions at all then please reach out (call Hamish on 021 752 270 or Riann on 027 261 8760).

RUM

for more help feel free to reach out. Get in touch with Riann Umaga-Marshall