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Information on the tax treatment and administration of the COVID-19 wage or leave subsidies paid by the Ministry of Social Development.

Employers may be eligible for a wage subsidy or a type of leave subsidy.

Where employers are paid a subsidy by the Ministry of Social Development (MSD) there are tax implications to consider.

Income tax

The income tax implications of the subsidy for the employer are as follows.

  • The receipt of the subsidy is excluded income for the employer under section CX 47 of the Income Tax Act 2007.
  • The employer will not be entitled to an income tax deduction for wages paid out of the wage subsidy under section DF 1(2) of the Act.
  • The amount of wages paid in excess of the wage subsidy (amounts funded by the employer) are deductible as normal.


The employer will not be liable for GST on the subsidy received from MSD. Legislation has been passed confirming that the COVID-19 wage subsidy is non-taxable.

New legislation was required because ordinarily government grants and subsidies paid to GST-registered businesses are subject to GST under the Goods and Services Tax Act 1985. However, if the COVID-19 subsidy payments weren’t excluded from GST, this would mean that GST-registered businesses would have to return GST on the payments they receive from the government. As a result, this would mean these GST registered businesses would have less money from the subsidy available for supporting their staff when compared to businesses which are not registered for GST. The new legislation confirms that GST does not apply to these payments.

Administering the subsidy

Wage subsidies and leave subsidies should be passed on to the employee by the employer and processed as part of the employee’s normal wages. All deductions of PAYE, KiwiSaver, Student Loans, child support etc are made as normal.

If the total wage (subsidy + employer-funded pay) amounts to the same wages as previously, the pay and deductions on the employee’s payslip should be the same. Whether employers top-up the subsidy with cash payments or annual leave is up to them to arrange with staff. If your employee's usual wages are less than the subsidy, you must pay them their usual wages. Any difference should be used for the wages of other affected staff.

Employees cannot be forced to use their annual leave entitlement.

Employers should keep accurate records detailing the amount of the subsidy received and details of the employees it has been paid to. This will assist the employer if MSD requests to review their records later.

If the 12-week wage subsidy is paid by the employer as a single lump-sum there are no tax consequences for the employer. As discussed above, the receipt of the subsidy is exempt income and the payment to an employee is not deductible so it doesn’t make any difference if they pass it on immediately, or over time. However, for employees there are likely to be tax consequences if the payment is made prior to 31 March 2020.

Suspending KiwiSaver contributions while receiving the wage subsidy

Wage subsidies should be processed as part of the employee’s normal wages and deductions of KiwiSaver contributions are made as normal.

Provided certain criteria are met, KiwiSaver contributions may be suspended where an employee is receiving the wage subsidy. 


Example: Blue Sky Ltd

Blue Sky Ltd has 40 full time employees. It applied for the wage subsidy when it was first announced and received a payment from the Ministry of Social Development (MSD) of $150,000 (as per the initial cap). As Blue Sky Ltd is now eligible for a wage subsidy of $281,184, MSD has made an additional payment of $131,184 to Blue Sky Ltd. Both payments are excluded income and will not be taken into account by Blue Sky Ltd when calculating its income tax liability. As the payment is a subsidy there are no GST implications on its receipt for Blue Sky Ltd.

The MSD payments are made to the employer to subsididise the gross payment of wages and therefore remain subject to PAYE and other usual employee deductions. Blue Sky Ltd is only able to pay its employee 90% of their regular wage, including the wage subsidy. The wage subsidy and (reduced) pay are processed by Blue Sky Ltd in the normal manner through its payroll system, and PAYE and KiwiSaver etc are deducted from the payments, withheld by the employer and passed on to us.

Please note that the wage subsidy amount should be included and returned as a gross amount in an employee’s pay, not a net amount.

Example: Food Bank Wellington

Food Bank Wellington is a registered charity which operates a small second-hand shop to help generate funds for the food bank it operates. Although there are volunteers who work in the second-hand shop, it also employs three part-time staff who are university students. The charity shop is not an essential business and will be closed for at least the next four weeks, during the Level 4 lock down. Food Bank Wellington applies for and receives a wage subsidy from the Ministry of Social Development (MSD) of $12,600. Food Bank has no income tax or GST obligations in respect of the subsidy received.

Food Bank Wellington includes the wage subsidy from MSD in the pay of its part-time employees. With the wage subsidy it can continue to pay its employees while it is shut down. The subsidy is made as a gross payment from MSD and Food Bank Wellington withholds PAYE, KiwiSaver and student loan from the payments as it would with regular wages.

Example: Stef's Jet Skis Ltd

Stef's Jet Skis Ltd offers boat tours in Queenstown. It employs 5 full-time staff and 10 part-time staff. Its main customers are international tourists. As a result of COVID-19 it has seen a significant reduction in bookings and, with the closing of the borders, expects this to get worse over the coming months.

Stef's Jet Skis Ltd is eligible for the wage subsidy. When it applies for the subsidy, it receives a $75,158 lump sum payment from the Ministry of Social Development (MSD). Stef's Jet Skis Ltd is required to pass the subsidy on to its employees. It is not:

  • liable for income tax on the subsidy received as this is excluded income
  • required to account for GST on the subsidy received
  • entitled to an income tax deduction in relation to the portion of wages paid funded by the wage subsidy.

Stef's Jet Skis Ltd can now afford to pay its staff the equivalent of their regular wage. The subsidy is included and processed in the company’s ordinary payroll with the relevant KiwiSaver, child support, student loan and PAYE deductions withheld.