The COVID-19 Response (Taxation and Other Regulatory Urgent Measures) Act 2020, passed under urgency on 30 April 2020, gives effect to a number of measures designed to stimulate the economy and assist businesses struggling as a consequence of the global COVID-19 pandemic. One of those measures is the Small Business Cashflow Scheme (“SBCS”).
The SBCS has been designed to assist small-to-medium businesses that have been adversely affected by COVID-19. A new section 7AA has been inserted into the Tax Administration Act 1994 to authorise the Commissioner, on behalf of the Crown, to lend money under the SBCS to business who meet the eligibility requirements. Those eligibility requirements are not detailed in the legislation, but instead must be published on an internet site administered by the Commissioner.
The eligibility requirements were published on 12 May 2020, and are in line with the initial Government announcement which confirmed that the SBCS will provide interest free loans of up to $100,000 to businesses employing 50 or fewer full-time equivalent employees. A business will be eligible for $10,000 and, in addition, $1,800 per equivalent fulltime employee (up to the maximum amount). A sole trader can receive a loan of up to $11,800. The loan will be interest free if it is paid back within a year. The interest rate will be 3% for a maximum term of five years but there will be no requirement to make any repayments for the first two years. In addition, businesses will also need to meet the same eligibility criteria as for the wage subsidy scheme and will have to declare that they are a viable business, which Inland Revenue has said generally means the directors or owners have good reason to believe it is more likely than not the business or organisation will be able to pay its debts as they fall due within the next 18 months. Businesses also need to confirm that they will use the money for core business operating costs, and enter into a legally binding loan contract. They must also keep evidence of ongoing viability at the time of requesting the loan, as Inland Revenue may audit the application.
While it may seem curious that the Commissioner has been tasked with advancing money rather that collecting it, it is likely to be because Inland Revenue has access to detailed financial information about businesses, and highly sophisticated software to review that information at its disposal. Inland Revenue will therefore be well-placed to confirm eligibility, and to investigate false or misleading claims. Another reason Inland Revenue may be responsible for administering the SBCS is that it has established collection mechanisms, which, following a Supplementary Order Paper issued on 12 May 2020, it will be empowered to use in administering the SBCS. The Commissioner will also be permitted to rely on her care and management powers, which will afford her the ability to provide relief to those who are unable to repay.
It is interesting that the Income Tax Act 2007 has been amended to ensure that the conversion of a portion of the loan to a grant will not have adverse income tax implications for the applicant. Section DF1(1)(cb) has been added to ensure that business expenditure that is paid by the loan continues to be tax deductible if any part of the loan is converted to a Government grant. Similarly, section EW 45 has been amended to ensure that if conversion to a Government grant occurs, this does not trigger debt forgiveness income under the financial arrangement rules. Does this presage a future write-off of SBCS loans by the Government? With no current indication of this, only time will tell.
© 2020, G D Clews and S J Davies