Tax Relief Measures and GST Implications for Businesses Affected by Disasters
In the aftermath of a disaster, dealing with taxes is the last thing anyone wants. However, Inland Revenue understands this and offers various tax relief measures for emergency events to ease the burden of filing and payments. These measures are especially helpful during the transition from response to recovery. However, when it comes to businesses affected by significant adverse events, such as those filing insurance claims, the tax implications go beyond the initial relief.
At a high level, the tax principles for insurance receipts and compensation are relatively straightforward. They generally follow matching principles:
1. Business Interruption Insurance (lost profits): Taxable in the period of interruption.
2. Material Damage or Increased Costs of Operations Insurance: Taxable to the extent deductible costs or losses are incurred, or offset against capital costs. If the insured asset is destroyed, the insurance becomes disposal proceeds, which may result in taxable depreciation recovery income or capital gains.
3. Trading Stock Insurance: Taxable assuming a deduction is taken for the damaged stock.
However, in cases like the Canterbury Earthquakes, where claims are extensive and prolonged, several issues can arise:
– Allocating insurance to the appropriate year(s) if settlement takes time.
– Dealing with advance or interim payments.
– Handling unspent insurance funds.
– Depreciating affected assets and recording disposal.
– Managing allocations of insurance, historical cost, and book values in a condensed or incomplete tax fixed asset register.
– Considering the impact on deferred tax.
Insurers often prefer global settlement agreements that focus on Business Interruption and Material Damage policies. However, for tax purposes, a more detailed analysis is required, down to individual assets and activities. Settlement values, exclusions, and claim deductions further complicate the tax process.
Apart from income tax implications, businesses should also consider the GST impact of insurance payments. Most insurance payments made to GST-registered businesses for insured business risks are GST inclusive. This means that 3/23rds of the insurance payment needs to be included in the GST return and paid to Inland Revenue. Exceptions may apply, so it’s important to consult a tax advisor. However, when the insurance payout is used to purchase replacement goods, the business can claim back the GST on those costs.
Grants can also be available to assist impacted businesses during times of crisis. Different grants may have different GST requirements, including whether the grant is treated as GSTable income and the application’s GST inclusive basis.
These are just general tax considerations before factoring in any specific tax relief measures introduced for major disasters. Inland Revenue is currently assessing whether the concessions implemented for the Canterbury Earthquakes are suitable for Cyclone Gabrielle. These concessions include depreciation recovery income rollover relief, uneconomic-to-repair situations, and optional timing rules.
Inland Revenue has already announced some initial tax relief and assistance for taxpayers affected by the flooding and Cyclone Gabrielle. The assistance includes an extension of the donated trading stock concession, removal of penalties and interest for late filing or payment, deadline extension for R&D Tax Credits, installment payment options, financial hardship support, provisional tax estimation, income equalization scheme, child support assistance, updating estimated income for Working for Families, and tailored tax codes.
Stay informed about the latest tax relief measures and assistance provided by Inland Revenue for those affected by disasters.
Your Outside Team
