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Following Auckland’s anniversary weekend floods, the phones of insurance providers have been ringing off the hook as businesses seek funds to replace various assets destroyed in the floods or to cover reduced turnover caused by the floods.
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Other taxpayers have been unable to meet return and payment filing deadlines as a result of the disruption. This Tax Talk provides some answers.
See the 15 February update below.
As with all things, insurance receipts have a tax impact. We summarise below the high-level impacts, but as the situation facing every business is unique, this should not be treated as the definitive answer to your queries regarding the tax impact of insurance receipts. This information is current as of 9 February 2023; there may be further changes announced over the coming weeks.
Insurance receipts will generally be subject to GST but there are several nuances in the rules. To be subject to GST the payment must relate to a loss incurred in the course or furtherance of a taxable activity (e.g. a supermarket that receives an insurance payout in relation to trading stock) and the insurance premiums must have been subject to New Zealand GST under the normal rules (so not under the remote services rules) at the time the premium payments were made.
The GST must be returned during the period in which the insurance payment is received.
The income tax treatment of insurance receipts will depend on the nature of the insurance payout.
If the insurance payout relates to fixed assets, its treatment will depend on what happens to the replaced asset.
For a fixed asset that is written off, it is treated as proceeds on disposal, net of any GST. If the tax book value is less than the proceeds on disposal, then depreciation recovery income would arise, which would need to be returned in the income tax return. If the tax book value is more than the proceeds on disposal, then a further depreciation loss would arise, which can be claimed as a deduction in the income tax return. Note, this will include any buildings that are rendered useless by the floods and demolished or abandoned, as damage to the building was caused by a natural event outside the taxpayer’s control.
A fixed asset that is not written off is treated as a reduction in its tax book value. This reduction is net of any costs incurred. For example, if an asset has a tax book value of $750,000, expenditure of $50,000 is incurred to bring it back to original working condition and the insurer pays out a sum of $70,000 in relation to the floods, then the asset’s new tax book value is $730,000. This may have an impact on the calculation of depreciation for future years.
If the insurance payout relates to items other than fixed assets (for example, business continuity insurance and loss of trading stock), then it will generally be treated as taxable income. The income is allocated to the income year in which the amount is received, or the amount is reasonably able to be estimated – whichever is earlier. However, if the replaced income relates to a later period the income is taxable in that later period.
Provisions allow Inland Revenue to remit late filing and late payment penalties where returns and payments were late due to circumstances outside a taxpayer’s control. As GST returns and some provisional tax payments were due around the time of the Auckland anniversary long weekend, we anticipate Inland Revenue will be forthcoming in providing relief. On 8 February, the government issued an Order in Council that will allow Inland Revenue to remit Use Of Money Interest in the same circumstances. If you have filed a return or made a payment late as a result of the floods, an application will need to be made to Inland Revenue to seek relief.
This covers people who farm or have a New Zealand agricultural, fishing or forestry business. They may be able to make a late deposit or an early withdrawal of funds in the scheme outside of the usual timeframes. See Inland Revenue’s Discretionary relief page for details.
There are various other relief measures available to individuals not in business, and the best place to check these is the Inland Revenue website.
If you have any queries regarding the tax impact of any insurance receipts or other relief measures, please contact your Baker Tilly Staples Rodway advisor.
Back to Work Grants are available for those businesses impacted by the Auckland Anniversary floods. Eligible businesses can receive up to $5,000. Key criteria are that the business must:
The grants themselves are:
Applications for the grants can be made through the Auckland Chamber (aucklandchamber.co.nz) or via 0800 005 605.
At this stage, the government has not announced specific relief for those businesses impacted by Cyclone Gabrielle. However, we anticipate this will come in due course.
This article will be updated with any updates on relief being offered.
DISCLAIMER No liability is assumed by Baker Tilly Staples Rodway for any losses suffered by any person relying directly or indirectly upon any article within this website. It is recommended that you consult your advisor before acting on this information.
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