COVID-19 has created significant uncertainties for the Crown tax revenue estimations and the valuation of Crown assets, as the calculations include macroeconomic assumptions and forecasts. It is difficult to determine likely repayments, defaults and customer behaviour, especially during times of economic uncertainty.
In response to the impact of COVID-19, since 2020, the New Zealand Government has taken a number of actions to support the wellbeing of New Zealanders and the New Zealand economy, including the introduction of a Small Business Cashflow Scheme and the COVID-19 Resurgence Support Payment and COVID-19 Support Payment schemes administered by Inland Revenue. Inland Revenue has also applied new legislative powers to remit penalties and interest relating to tax debt where possible.
Tax revenue for the 2021–22 financial year is based on the revenue recognition methodology disclosed in Note 3. While most revenue is recognised in cash in the same financial year, these financial schedules include tax estimates and assessments that are not due to be paid until after 30 June 2022. The amount owing is reported as a portion of the 'not due' receivables (refer Note 4). $17.410 billion of revenue is not yet due as at 30 June 2022, an increase of $1.750 billion or 11.18% from 30 June 2021. This increase is largely due to higher income tax revenue this year.
The estimation of income tax revenue for companies and other persons is material, complex and requires a significant degree of estimation. These estimations are for annual taxes, and while most taxpayers pay annual income tax in instalments using the provisional tax regime, final income tax owed, or tax refunds due, for a year is only known with reasonable certainty when the taxpayer files a terminal tax assessment for that period.
The method of estimation used for each taxpayer depends on their residual income tax for the prior tax year, and if this exceeds $5,000, it also depends on the provisional tax method adopted by the taxpayer for the current tax year.
For the largest group of taxpayers (who had residual income tax over $5,000 for the prior tax year and have adopted the standard provisional tax method for the current tax year), we estimate companies and other persons revenue based on macroeconomic forecast information. Further details on the estimation process are discussed in Note 3.
Past due debt has increased in 2021–22 by $462 million (10.54%) to $4.846 billion. This growth is larger than in 2020–21, when the past due debt increased by $126 million (3.2%).
The increase in overdue tax debt was mainly due to increases in GST and income tax debt balances. These debts were $301.5 million and $206.0 million higher, respectively, than 2020–21.
In 2021–22, overdue tax debt grew at a comparable rate to tax revenue, resulting in a similar result for the percentage of tax debt to revenue of 4.6% compared to 4.5% the previous year. Given the turmoil that businesses faced in the last 2 years, we expected the level of debt to increase.
The ratio of tax debt to tax revenue compares favourably with other similar tax administrations, some of which have ratios of as much as 7% to 17%.
We have been putting effort into preventing debts from happening, or quickly helping customers to recover from their debt position (for example, text campaigns for the 7 February due date) and continued to focus on supporting customers through COVID-19, administering COVID-19 support products, setting up payment arrangements (including self-service arrangements) and applying our new powers to remit penalties and interest where possible. This year, approximately 120,000 customers have set up a plan to pay their tax over time. These arrangements covered $2.38 billion of debt. Of this, $491 million has already been paid in full.
Despite an increase in past due debt over the last year, the amount of debt collected in the past 6 months has been higher than projected at the previous valuation. The impact of COVID-19 on employment and the general economy has been much less than expected.
The independent external valuer has now increased the repayment assumptions for debt less than 5 years old to be closer to the average experience over the last 4 to 5 years. This is consistent with the approach taken before COVID-19.
The most significant assumptions changes are for debt that is under 1 year old which are also impacted by the changes in processing debt following Inland Revenue's business transformation. The repayments on this debt have recently been significantly higher than the COVID-19 impact previously assumed.
However, as noted by the valuer, it is not possible to assess with any certainty the implications of COVID-19 on the value of tax receivables or the economy as a whole, in terms of length or the degree of impact. The uncertain and volatile nature of future debt repayments means that there may be significant uncertainty in the estimated value of these receivables. The valuation reflects the increased levels of debt observed in the data up to 30 June 2022. Future repayments of debt will be dependent on the economic impacts of COVID-19 on our customers and on the effectiveness of our compliance activities and relief mechanisms such as instalment arrangements.
Note 4 provides more information on the gross value and fair value of tax receivables and the significant assumptions and sensitivities behind the fair value.
In response to COVID-19, the Government has made Small Business Cashflow Scheme loans available to eligible small-to-medium-sized businesses. Eligible businesses can borrow a $20,000 base amount plus an additional $1,800 per equivalent full-time employee, up to a maximum loan of $110,000. To be eligible for the loans, borrowers need to declare that they are a viable business, and that they will use the money for core business operating costs.
The loan terms have changed since the scheme was introduced. Initially, the maximum loans were $100,000, with no interest payable if they were fully repaid within 1 year. On 9 November 2020, the scheme was extended to 31 December 2023 and the interest-free conditions were extended from 1 year to 2 years, including customers with pre-existing loans.
On 21 March 2022, the scheme was updated to increase the base loan from $10,000 to $20,000 for new loans. Existing borrowers were also eligible for a top-up loan of $10,000, plus any amount they were eligible for but did not take in their initial loan. The interest-free rule was also changed; all loans are now interest-free for the first 2 years regardless of whether they are repaid within 2 years. This change has resulted in a $50 million impairment on the loans at 30 June 2022.
In 2021–22, a further $538 million (2020–21: $298 million) has been disbursed and a further $362 million (2020–21: $112 million) has been repaid. The fair value of the loans as at 30 June 2022 is $821 million.
The most critical assumption for determining the fair value is the default rate of the loans, which informs the initial fair value write-down of the loans.
The initial fair value write-down on total loans of $230 million is due to these unsecured loans being made available to businesses severely impacted by COVID-19 at below market rates and other favourable terms.
Note 6 provides more information on the scheme, the valuation model and the significant assumptions and sensitivities behind the fair value.
The fair value of the Student Loan Scheme at 30 June 2022 is $9.209 billion, a net decrease of $1.633 billion (15.06%). The most notable change this year is the $1,113 million fair value remeasurement loss (2021: $745 million gain).
The fair value remeasurement loss is largely due to changes in discount rates and risk adjustments since the 'Budget Economic and Fiscal Update 2021'. This is partially offset by positive updated salary wage assumptions. The initial valuation data indicates that COVID-19 is having less of a negative impact than previously modelled for New Zealand-based borrowers.
Since the June 2021 valuation, our data shows that the New Zealand economy has shown remarkable resilience to the impact of COVID-19 so far. It is now expected that fewer New Zealand-based borrowers will be adversely impacted by it. However, we now expect more overseas-based borrowers to be impacted. As at 30 June 2022, we have a COVID-19 allowance of $135 million in relation to deterioration in overseas-based borrower compliance.
The impact of COVID-19 on the economy, employment prospects, overseas repayments and behaviours is still uncertain. The main uncertainty relates to the compliance of overseas-based borrowers. The domestic economy has been very resilient to the pandemic.
Note 7 provides more information on the Student Loan Scheme, the valuation model and the significant assumptions and sensitivities behind the fair value.
The rules and restrictions implemented by the Government to reduce the community transmission of COVID-19 have impacted the trading and profitability of many businesses.
The Government established 2 schemes to financially support businesses. The 'COVID-19 Resurgence Support Payment' operated between February 2021 and February 2022 to provide support to businesses following a change in alert levels in the COVID-19 Alert System. From February 2022, the 'COVID-19 Support Payment Scheme' has operated to provide financial support to businesses during changes in settings in the COVID-19 Protection Framework (traffic lights).
In total, across both schemes, expenditure of $4,019.317 million was incurred in 2021–22 (2020–21: $199.983 million).