The administrative mechanics were included in the COVID-19 Response (Taxation and Other Regulatory Urgent Measures) Act 2020 passed yesterday. Inland Revenue will administer the scheme.

The key features of the loan scheme are as follows:

• Up to $100,000 to firms employing 50 or fewer full-time equivalent employees. The loan amount is calculated as $10,000 for an applicant plus $1,800 per full time employee.
• The eligibility criteria are:
  • The wage subsidy scheme criteria plus:
  • A declaration that the business is viable and will use the money for core business operating costs.
• The business and Inland Revenue will have a legally binding loan contract.
• The loan will be for a maximum 5 years, with repayments not due in the first 2 years.
• No interest is charged if the loan is repaid within the first year. A 3% interest rate applies otherwise.
• Inland Revenue will administer and audit the scheme, with applications open from 12 May. The Act passed yesterday contains specific provisions relating to the administration of the scheme. A decision to grant or decline a loan will not disputable and information can be shared with the Ministry of Social Development (MSD) (the administrators of the wage subsidy) to administer the scheme.

Our observations

The loan scheme is the latest Government measure aimed at providing immediate cash flow support for business. This follows the wage subsidy and tax loss-carry back provisions.

This measure is aimed solely at businesses with 50 or fewer employees. It is to support their working capital requirements. It is an additional and welcome measure, in the current economic circumstances.

It is worth noting that the scheme is not free money. Eligible firms will need to pay back the borrowed funds within 5 years, and interest will accrue from year 2 onwards (albeit at a rate lower than most commercial rates). Repayment will obviously depend on whether a borrower survives. To the extent there are business closures, the Government will fully bear the risk of default.

The entry requirements need careful consideration. As a first step, applicants will need to meet the same entry criteria as the wage subsidy. That requires among other things, a business: 

• To be registered and operating in New Zealand.
• To experience a minimum 30% decline in actual or predicted revenue with that decline related to COVID-19.
• To have taken active steps to mitigate the impact of COVID-19.
• To retain employees for the period of the subsidy and pay them at least the subsidy amount.

Using the existing wage subsidy criteria to determine eligibility is understandable. However, we are seeing a number of questions about how those criteria practically apply (and are viewed by MSD when auditing compliance). They will be equally relevant here. They suggest that some care should be taken to ensure the requirements are met before applying for the loan.

The business will also need to declare that it is a viable business and that the funds will be used for business operating costs.

There is yet no detail on what qualifies to establish that a business is viable. However, good business practice would suggest financial, including cashflow, forecasts would be required.  Ideally, some scenario testing would be useful. Our first reaction is that what the bank would require is a useful starting point. The difference is that the Government will not be requiring security or a mortgage.

Early clarity on that requirement would be welcome.

The role of Inland Revenue in administering the scheme is critical. The closest is the student loan scheme which Inland Revenue administers. However, Inland Revenue does not determine eligibility for student loans.

It is unclear whether Inland Revenue will be doing any checking before a loan is approved.  It may simply rely on the declaration (as MSD has done with wage subsidy claims). However, the Department’s existing income and other data sources and analytics may be used. This may mean that if there is existing debt to Inland Revenue that loans will be declined. (Money owed to Inland Revenue is often seen as an early indicator of potential insolvency).

The Commissioner’s decision to decline a loan cannot be disputed. If the loan is not automatically approved, this will put significant onus on Inland Revenue to understand the business’ circumstances.

Inland Revenue’s enforcement will need to recognise that businesses will be applying in a highly uncertain environment. Some errors and differences in interpretation will be inevitable. When testing whether the loan should be repaid there will be areas of judgement. Inland Revenue has experience of this when determining what to accept for payments of tax. However, as an unsecured loan creditor, the approach may need to be modified.

Although welcome, significant learning on the part of business and Inland Revenue is required. It may be best to take additional time to understand the scheme and its requirements rather than applying on May 12.