COVID-19 UPDATE: BUSINESS RESCUE, NEW TAX LEGISLATION AND RESTRUCTURING TO ENSURE LIQUIDITY
Posted by Jesvin Boparoy & Guest Author on April 9 2020 in News
Over the last two weeks, the New Zealand Government has provided a series of rescue packages for businesses financially impacted by the four-week lockdown and beyond.
Shieff Angland Lawyers have teamed up with Tax Professionals to give some general guidance on the government packages, legislative changes and practical tips and options to keep your business afloat.
SMALL AND MEDIUM SIZED BUSINESS RESCUE PACKAGES
The Government recently launched a Business Finance Guarantee Scheme for certain small and medium-sized businesses. The scheme will allow eligible businesses affected by Covid-19 to seek short term loans (for up to the three years) in the sum of up to $500,000 from approved banks. The central feature of the scheme is that the Government is guaranteeing 80% of the risk of scheme loans, while the banks are covering the remaining 20%. The assumption is that most of the risk by the Government (taxpayers) will encourage banks to give business loans that may otherwise have appeared to be too risky. These loans will increase the survival chances of certain businesses.
To be eligible your business will need to earn an annual revenue between $250,000 to $8 million and meet certain funding criteria approved by your existing bank. A normal lending process will be followed by the banks.
There are certain exceptions to the use of the loan. In particular:
- The funds used must be used to meet urgent liquidity or bridging financing needs due to Covid-19
- Certain businesses and industries are excluded from the scheme including the tobacco industry, property development, property investment and agriculture (amongst others)
- Businesses can only take out a loan under the scheme if they have used their bank’s existing facilities (other than credit card/trade finance)
- Participating banks released to date include ANZ, ASB, BNZ, Heartland Bank, HSBC, Kiwibank, SBS Bank, TSB and Westpac.
Read more about the scheme here or call your bank to discuss your eligibility.
WAGE AND LEAVE SUBSIDIES
For employers and employees, the Government has introduced a Wage Subsidy Scheme to help employees subsidise wages for a period of 12 weeks starting from 17 March 2020. Every organisation in New Zealand who meet the eligibility requirements can apply for the Wage Subsidy including employers, contractors, sole traders, self-employed people, registered charities, incorporated societies, non-governmental organisations and even new businesses.
To be eligible the employer must have suffered or be able to project it will suffer a 30% decline in revenue compared to last year for any month between January 2020 and June 2020 (when the subsidy ends). Furthermore:
- The employer is required to declare it will make its best endeavors to continue to employ affected employees at a minimum of 80% of their normal income for the duration of the subsidy
- There is a further requirement for employers to take active steps to mitigate the impact of Covid-19 on their business (e.g. by engaging a Financial Adviser or Consultant)
- The employer will need to sign a declaration form to that effect
Please note that any income received under the Wage Subsidy will continue to be subject to PAYE in the normal manner.
In addition to the above, there is a special subsidy available for “Essential workers’ leave payments” and for self-isolation as a result of Covid-19. These are also available to businesses, including the self-employed and contractors, who satisfy the eligibility criteria and are prevented from working.
You can read more about the essential workers’ leave payments scheme here.
NEW TAX LEGISLATION TO FREE UP CASH FLOW
On 27 March 2020, Parliament passed the Covid-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020, which includes various tax related amendments that may help businesses free up cash flow. We summarise the key measures below:
Reintroduction of depreciation on commercial and industrial buildings:
From 1 April 2020 onwards, owners of commercial/industrial buildings (including hotels and motels) can claim depreciation on those buildings as a deduction expense at 2% DV or 1.5% SL basis. Seismic strengthening costs are also eligible to be included in the depreciable value of the buildings. Restoring depreciation deductions will help support businesses with cashflow in the near-term and assist in the broader economic recovery by encouraging business investment in new and existing buildings.
Fewer small businesses having to pay provisional tax:
The provisional tax threshold has been increased from $2,500 to $5,000 for the 2020/2021 tax year. This means if your business has a residual income tax liability of NZ $5,000 or less, you will now have until 7th February 2021 to pay the full tax amount, instead of having to pay in instalments throughout the year. This is a permanent change and lowers compliance costs for smaller taxpayers (those who pay approximately $95,000 in annual tax) and allows them to retain cash for longer.
Writing off interest on late payment of tax:
Inland Revenue has been given the power to waive interest charges on late tax payments for taxpayers who have had their ability to pay their tax on time significantly and adversely affected by the Covid-19 outbreak. The threshold appears to be high and solely based on the discretion of the Commissioner of Inland Revenue. While interest can be remitted, the core tax debt must still be paid. This applies to tax due on or after 14 February 2020.
Please click here to read more about the eligibility criteria.
DIFFICULTY PAYING TAX?
Tax Pooling arrangement:
If you’re having difficulty paying outstanding or upcoming tax payments, then consider setting up a Tax Pooling arrangement to defer the full payment to a time in the future that better suits your business’ cashflow. There are various Inland Revenue approved Tax Pooling Agents who can assist you with the process (and now at reduced rates). Please contact us to discuss. To read more about Tax Pooling Agents click here.
Inland Revenue has indicated their willingness to work with affected businesses e.g. entering into instalment arrangements to manage the payment of outstanding tax ahead of time or in very extreme cases seek financial relief.
Immediate deductions for low value assets:
Taxpayers will be able to deduct the full cost of low-value assets in the year they purchased them, rather than having to spread the cost over the life of the asset. Under the new rules, taxpayers are temporarily able to claim an immediate deduction for any assets costing $5,000 or less in the 2020/2021 income year (previous threshold was $500). This threshold will reduce permanently to $1,000 in the 2021/2022 income year. The aim is to reduce compliance costs for businesses and, as it is a temporary measure, it will incentivise them to bring forward investments and encourage spending.
SAFE HARBOUR PROVISIONS TO BE ENACTED UNDER THE COMPANIES ACT 1993
The Government has now announced that there will be legislative changes to the Companies Act 1993 which will place existing debts of a company into ‘hibernation’ until they are able to start trading normally again. This will help businesses facing insolvency to sort out their liquidity problems after the economic impact of Covid-19.
Changes are also being made on director’s obligations during Covid-19 including an introduction of “safe harbour” provisions for insolvency duties.
The safe harbour provisos are intended to be ‘temporary’ so it is not clear how long the protections will remain in place or if New Zealand will closely follow Australia’s legislation and impose a ‘six-month’ hibernation period to cushion the economic impact of Covid-19. Click here to read more.
ALTERNATIVE RESCUE SOLUTIONS:
CREDITOR’S COMPROMISE, RESTRUCTURE AND VOLUNTARY ADMINISTRATION
Once the interim reliefs provided by the Government “safe harbour” initiatives described above come to an end, businesses must find its way out of troubled waters. Some companies will lose too much revenue after the lockdown and have too much debt to survive.
The key to surviving and thriving during the aftermath is to identify a strategic path forward to retain cash and remain afloat. The first measure is to reduce unnecessary costs while ensuring good working capital management. Working capital can be split into the short-term receivables, payables and inventory. In short, your receivables and inventory levels should be as low as possible and your payables as high as possible to increase your cash position.
If cash is not readily available, then strategic restructuring must be considered alongside other existing legislative rescue procedures such as a Creditor’s Compromise or Voluntary Administration.
There are three main rescue procedures provided for by the Companies Act 1993 for businesses. These are:
- Part 14 – the Creditor’s Compromise
- Part 15 – the Court Approved Creditors Compromise or Scheme of Arrangement
- Part 15A – Voluntary Administration (seldom used in New Zealand)
1. Part 14 – Creditor’s Compromise:
Part 14 of the Companies Act 1993 allows a company to come to a compromised agreement with its creditors over a certain period. The intention is to allow the company to survive into the future (rather than go into liquidation/receivership) and continue to do business with its creditors. To succeed the compromise must be approved by a “majority of creditors” during a vote at a creditors meeting. Court approval is not required. A majority vote will be creditors who have debts totalling 75% of the debt held by those taking part.
Each compromise will be different but most of them will usually have similar features and contain similar issues which are important to think about before proceeding:
- Creditors will be repaid in full or in part over a certain timeframe
- If creditors are paid in part, they will agree to write off the balance of the debt
- The compromise is documented after a meeting, but no court approval is needed before it can be effective.
- Under a creditors’ compromise, personal guarantees and/or security agreements remain effective against Directors and Shareholders and only the company is released from its obligations
- Some existing agreements may have ‘termination clauses’ which come into effect on a Creditors’ Compromise. Accordingly, any business choosing this option should speak to a lawyer first and determine whether it is a right option and how it may affect existing agreements in place.
2. Part 15 – Scheme of Arrangement, Amalgamations and Compromises
Businesses can also resort to Part 15 of the Companies Act 1993 which allows the Court to make an order for an arrangement, amalgamation or compromise of creditors to be binding upon a company or any other person that the Court thinks fit.
It is possible then for directors to request to be released from personal guarantees under Part 15 scheme of arrangement or creditors compromise. However, its success will ultimately be determined on whether the Proposal is accepted by the majority of creditors voting (being creditors representing 75% in value of the liabilities owed by the business under the scheme) and on Court Approval. The proposal will then apply to all creditors -even those that objected to the scheme.
This procedure has a wider scope than Part 14 (which is limited to compromises with creditors).
3. Part 15A – Voluntary Administration
The effect of a Voluntary Administration is to allow an independent person (called an Administrator) to find a way to save the business and pay off creditors. The regime is provided for under Part 15A of the Companies Act 1993.
As soon as the business goes into voluntary administration, the debts are effectively frozen, and the company cannot be placed into liquidation. No creditors can act against your business to recover debts or seize assets for the duration of the Voluntary Administration (unless agreed to by the Administrator or permitted by the court). In a way, it allows the Administrator time to find a way forward for your business.
The focus is on investigating the company’s affairs and determining the best way forward. In the end, what the Administrator will try to do is establish a Deed of Company Arrangement (DOCA) which sets out how the business will trade and how the creditors will be repaid.
The DOCA will need to be agreed to by the creditors and by special resolution of company directors and shareholders. If an agreement cannot be reached over the terms of the proposal, the company must go into liquidation.
The Voluntary Administration is seldom used in New Zealand because of the mandatory statutory and reporting requirements as well as costs of hosting meetings and advertising. There is also difficulty with getting secured creditors to agree to the DOCA. For that reason, the VA regime is most suited to larger businesses and secured creditors who are willing to support such a scheme.
The economic aftermath of Covid-19 is going to be unavoidable. To return to a healthy commercial standing after the expiry of the government imposed temporary reliefs will require thoughtful and strategic planning. The above strategies are what businesses should seriously contemplate together with a review of how they can convert stock to cash, recover debts, reduce tax obligations, explore restructuring, enter into a Creditor’s Compromise and/or appoint an Administrator so that it can outlive the aftermath.
Jesvin Boparoy | Associate
t +64 9 379 0655 | Jesvin.Boparoy@shieffangland.co.nz
Eshan Gupta | Tax Professionals (guest co-author)
t +64 9 625 0025 ext 8| firstname.lastname@example.org
This paper gives a general overview of the topics covered and is not intended to be relied upon as legal advice.