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The tax treatment and administration of the COVID-19 wage subsidy or leave support payments paid by the Ministry of Social Development.

Employers may be eligible for a wage subsidy or leave support payment for their employees.

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 subsidies for the employer are as follows.

  • The receipt of the subsidy by an eligible business under section CX 47 is excluded income (to the extent that the subsidy is passed on to the employee).
  • The employer will not be entitled to an income tax deduction for wages paid out of the wage subsidy under section DF 1(2).
  • The amount of wages paid in excess of the wage subsidy (amounts funded by the employer) are deductible as normal.

Any amount of the subsidy received that you do not pass on to the employee(s) is required to be repaid to MSD (following the criteria and declarations made at the time of applying). If the wage subsidy is not returned to MSD we may consider this as taxable income in which you will be required to include it in your income tax return and pay tax on it in the year it was received.

Example: Wage subsidy not returned to MSD

Employer receives a wage subsidy of $84,355.20. A total of $67,000 was passed on to employees in the 12-week period. The declaration at the time of applying for the wage subsidy required that funds not used to pay employees is required to be returned to MSD. If the excess ($17,355.20) is not returned to MSD, only $67,000 is treated as excluded income, the excess of $17,355.20 may be taxable income to the employer.

Repayments of the wage or leave subsidies

Where an employer has claimed a subsidy and MSD subsequently requests this be repaid, the employer will be entitled to a deduction for the salary/wage expense which was previously non-deductible.

The additional deduction for salary/wage expense will occur in the year the salary/wages were originally incurred. To claim the additional salary/wage expense deduction, the employer can amend their net profit in myIR or ask us to amend their return.

Provide us with the following information

  • Explanation of the original treatment of the subsidy received
  • Salary/wage expense claimed
  • Amendment to be made
  • Evidence including details and amount of the repayment to MSD
  • Revised financial statements to support the change.

See the 'Amending returns' page

Example: Wage subsidy returned to MSD

Employer applied for and received a wage subsidy payment of $70,296 for 10 employees on 6 April 2021. The amount was passed on to the employees over the next 12 weeks with the necessary PAYE and other deductions made as required. The $70,296 was treated as excluded income in the financial statements. The total salary/wage expense for the year was $312,000. The amount of the wage subsidy required to be passed on was treated as a non-deductible expense therefore the employer only claimed a salary/wage expense of $241,704 for tax purposes.

MSD subsequently requests $5,659.20 ($2,829.60 x 2 persons) be repaid after identifying two staff were only entitled to the part-time rather than full-time wage subsidy. The excluded income amount will be reduced but that has no direct impact on taxable income, only the change to the salary/wage expense impacts the net profit. The employer will amend their return/request a s113 adjustment to increase the salary/wage expense by $5,659.20 from $241,704 to $247,363.20. This has an outcome of reducing the net profit by the repayment amount ($5,659.20).


The employer will not be liable for GST on the subsidy received from MSD. The new legislation confirms that GST does not apply to these payments.

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.


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

Deductions are to be calculated on the total wage (subsidy + employer-funded pay).

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.

If the initial 12-week wage or leave subsidy is paid to the employee as a single lump-sum there are likely to be tax consequences for the employee.

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 or Inland Revenue request to review your payroll records.

Visit the Employment NZ website for information about employment law

Suspending KiwiSaver contributions while receiving the wage and leave subsidies

The 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 a 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 deductions such as PAYE and KiwiSaver are deducted from the payments, withheld by the employer and passed on to us.

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 (providing the full amount is passed on to its employees)
  • required to account for GST on the subsidy received
  • entitled to an income tax deduction in relation to the portion of wages 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.

Last updated: 03 Jun 2021
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