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Articles by Matthew Gilligan

Matthew Gilligan

Matthew's Top Corona Tips


Thanks to Covid-19, we are in a rapidly changing environment. Lockdown commenced on the 26th of March. It is quite possibly a two-month lock down, but that is conjecture. We are in the “initial 4-week period”.

The Government is putting things in place to help the country get through this period of uncertainty, which everyone should consider adopting if required. Secondly, there are a number of commercial strategies that I think business owners and investors should be looking at to soften the blow, or frankly, survive. I intend to keep this list updated as matters evolve. If you need help then reach out to us at GRA. We have a lot of experience and can help you with tough patches, including liaising with bankers and IRD, and, if required, assisting with insolvency planning and appointment of liquidators.

Below is a list of tips and commercial comments that I hope will assist you to get through this mess.

IRD Penalties Suspended For Late Payment

There will be no penalties or interest for non-payment of taxes if you are stressed for cashflow.

  1. you must file tax returns or you are in breach of the protocol and may not get the relief for not following procedure. So file those GST, PAYE and tax returns, even if you don’t pay.
  2. Note that it can be tax evasion not to file, as IRD require you to notify them by filing the return, so they can see what is going on.

Commercial Leases

Many businesses have commercial leases, and this overhead is crippling if the business is closed. Many leases (case by case) provide for rent not being payable when you are denied access to the building.

  1. Commercial tenants can (potentially) escape paying some, or all of their rent, when shut down by government under government emergency provisions. 
  2. Under our lease agreement at GRA for example, (which is a relatively standard ADLS lease), the clause is 27.5. The clause talks about a 'fair proportion' of outgoings being payable during an emergency, and provides for negotiation between the tenant and landlord. Proportion in my view, is:

    Number of days usable by the tenant, divided by the number days during the lock down.  

    Which for us is 0 days  / 4 weeks = $0

    Take a look at your lease, discuss the matter with your lawyer, and if appropriate, give notice to your landlord and stop paying rent. We did this and rent was ceased by the landlord the same week, saving close to $40,000 a month. 

    But note it is situational on the type of business. For example, for a warehouse storing goods during lock down, there is still use of the premises as storage. Therefore despite access being denied, there is still benefit, and the proportion payable is arguably higher by such tenant.  Whereas, say premises for an accountant or lawyer are unusable, with no stock or goods stored for resale. So the proportion of days usable are closer to zero in my view, (and my legal advisers).

    Check with your lawyers, read your lease agreements,  and act early is my suggestion. Its well worth looking at.


  3. Commercial landlords: On the flipside, all commercial landlords should pay attention and should look at their lease agreements – it’s case by case based on wording. See what your exposure is, and if you can, claim insurance as appropriate under your landlord’s policy. In saying that, it is highly likely that there is a pandemic escape clause preventing you from claiming – you will need to check with your lawyers and insurance agent.


Government Wage Subsidies

If you haven’t applied for wage relief, you can if your sales (actual or forecast) fall 30% in any one month between January and June 2020 due to C19 (compared to the same month last year). This may well be extended.

  1. The government subsidise you $585 for full-time employees and $350 for those working less than 20 hours per week.
  2. They pay 12 weeks upfront, and it’s as simple as filling in a form. Circa $7,000 per full time employee and $4200 per part time employee.
  3. They pay you in 3- 5 days. Fantastic support.
  4. You can (at this stage) only get the subsidy once.


Who can get it?

The below is published criteria from Work and Income.

If you're an employer, contractor, sole trader or self-employed, you may qualify to get the COVID-19 wage subsidy.

To qualify:

  • your business is registered and operating in New Zealand
  • your employees are legally working in New Zealand
  • the business has experienced a minimum 30% decline in actual or predicted revenue over the period of a month, when compared with the same month last year, and that decline is related to COVID-19
  • your business has taken active steps to mitigate the impact of COVID-19
  • you must retain the employees named in your application for the period of the subsidy


Tax Status of Payments

  • The receipt of the subsidy is non-taxable to the employer (you), nor is it subject to GST. However, it is also non-deductible to you.
  • You pass it through to the employee, who in turn pays tax and KiwiSaver on it, etc. In other words, the payment is still subject to PAYE and the employee’s normal deductions,
  • You then top up to the 80% if you are able. This is not a requirement of the wage subsidy scheme, but at a minimum you must pass on the entirety of the wage subsidy to the employee each week. If you do top up the wage subsidy, this amount is deductible to you as normal.


Other Finance Assistance

The Government have put in place a home finance mortgage holiday and business finance package, providing $6.5b for such activity.

  1. Mortgage Holiday: Consider applying for a mortgage holiday under the Government’s mortgage holiday scheme.
    a.    The package will include a six-month principal and interest payment holiday for mortgage holders and SME customers whose incomes have been affected by the economic disruption from COVID-19.
    b.    But note the ‘mortgage holiday’ is not actually a holiday. It’s a deferral of having to make payments for six months, over which time interest capitalises. In other words, the interest is added on to the loan.
    c.    Call your banker to apply for the holiday/deferral.

  2. Business Finance:  The Government has provided a credit underwrite arrangement to New Zealand banks, enabling them to grant business finance over three years, with a government guarantee of 80% of the loan. This money is available to businesses suffering from the Covid-19 downturn. You can apply for it with your banker, say you are suffering, and show a path to recovery through the loan.

    We recommend talking to your bank about the availability of such a loan, which will likely require you to prepare a set of cashflows and overview of what you will use the money for, along with your latest accounts. GRA can assist you as required with this matter.

    Features of the proposed business loan scheme include (extract from Government announcement):

    • The scheme will include a limit of $500,000 per loan and will apply to firms with a turnover of between $250,000 and $80 million per annum.
    • The loans will be for a maximum of three years and expected to be provided by the banks at competitive, transparent rates.
    • The Government will carry 80% of the credit risk, with the other 20% to be carried by the banks.


    Comments thereto (Business Loans Package):

    1. At present the Reserve Bank is in discussion with bankers, nutting out the detail including paperwork and process requirements (for the government undertaking to support the referred loans by 80% underwrite).
    2. The banking system is under huge pressure to provide the loans, yet they are not (at time of writing) in a position to provide them, practically speaking. But help is not far off.
    3. The banks will likely be asking for financials and cashflow forecasts in support. Make sure your accounting is up to date.
    4. I would expect practical implementation of this policy within a month, and should start to flow in the month of April 2020.


    General Banking and Liquidity Measures

    I further note that the government has moved to offer to buy back up to a whopping $30 billion in government bonds from bankers, institutions, and all others who wish to liquidate their position in government bonds. This represents New Zealand’s first money printing undertaking (that I am aware of).  The government and corporate bond market were looking impaired in mid-March, meaning that there was a threat to bank liquidity (and others) if there was no bond buyer. So the Government is now buying all government issued bonds back (if requested), ensuring plenty of liquidity in the banking system. (When the bond is bought back, a bank gets the cash deposited which thereby provides cash in the system.) A similar but different arrangement is in place for corporate bonds, for the same motivation (maintaining banking liquidity), where the government are buying corporate bonds.

    And the government has reduced bankers’ core funding ratios from 75% to 50%, which alleviates pressure on bankers to hold more cash.

    In addition:

    • The Reserve Bank has dropped the OCR
    • Capital adequacy increases prescribed by the Reserve Bank to come into force in 2020, have been deferred to 2021 or later.


    All and all, this amounts to a surety that money should remain available in NZ, and cheap. Two key ingredients of house price and business stability. So we should all take great solace in that.


    Convert Your Loans to Interest-Only for Cashflow

    For everyone’s consideration, think about swapping your loan form P & I to Interest-Only. For example, swapping a one million dollar loan from principal and interest to Interest-only, increases the cashflow by $30,760 per year.

    Numbers

    • $1m borrowed at 4.55%
    • $6,355 monthly Principal & Interest, over 20yrs at 4.55%
    • $3,792 monthly Interest-only, over 20yrs at 4.55%
    • $2,563 better monthly cashflow or $30,760 annual cash benefit


    Tenancy Management

    Residential tenants can’t be evicted before 60 days of non-payment of rent, as long as they ‘tried to pay’. This is going to be tough for landlords. I expect many tenants will see this as a loan or license to get into arrears, and recovery of the money will be extremely difficult for landlords. I would have thought the government would underwrite the rents, given they are (without consultation) exposing landlords to such credit risk. But this is in line with the general attitude towards landlords from this government it seems. I would suggest:

    • Make sure you are strict with your tenants after 60 days, so that they don’t try to extend your inability to commence eviction proceedings into a permanent rent holiday. While this might seem unkind, as many landlords are aware, some of our tenants do not operate in good faith. The only thing stopping them not paying (in many cases), is the threat of eviction. So have no delusions about this; we need to keep an eye on rents or we will be taken advantage of. Let’s face it, after 60 days arrears, the average tenant has no hope of catching up on rent in a timely fashion, or in some cases ever. So pay attention, if you think your tenants might be playing games with you.
    • Make sure your tenants (and property managers) understand that a “Mortgage Holiday” is a misleading concept. It is a deferral of payment for the landlord (if the landlord asks their bank for it), that gets paid later with interest added. So no holiday, just a deferral of when the interest payments get made, and interest capitalises/compounds on such unpaid loan costs.


    Coronavirus Scams

    Just be aware that along with the pandemic, the bottom-dwellers of the world are taking the opportunity to conduct all nature of Covid-19 scams.

    Reports include opportunistic attempts to use the COVID-19 pandemic to trick people into:

    • Donating to a fake World Health Organisation COVID-19 Response Fund
    • Paying a bitcoin ransom or risk their family being infected with COVID-19
    • Downloading malware from COVID-19 maps
    • Entering their details into phishing websites.
      Read more about these  C19 scams here.

    What will Coronavirus do to House Values?

    This blog is an overview of the help available and things to consider doing. In my next blog, I will talk about opportunities in property that will inevitably come from this C19 meltdown, and indeed to what extent I think there will be a meltdown.

    Suffice to say in my prelude, I have always preached buying on fundamentals. Areas with poor employment fundamentals (narrow/one horse towns), cause people to move to get a job. This makes one area experience recession much harder from a housing perspective, than say another with jobs. If you read my book Property 101, you would have got this loud and clear – a message that has been quite controversial to those investing in small towns. Some of those investors will reflect on my comments, as we see what areas are most volatile in coming years, and consider further why that happened. In a word, no jobs and resulting internal migration. More on this in my next blog.


    Comment Government Response
    These are the most difficult of times. But I must say the Government has provided a comprehensive and, for the most part, outstanding response. I applaud the breadth and speed with which they have moved, after they got going in March.

    • I do hope they comprehensively lock down the borders, and stop letting recent arrivals move around the town. (At time of writing, they put them in a hotel, but allow them to roam around to buy food etc. This seems risky to me, that the most contaminated part of our population where nearly 99% of cases come from, are allowed to roam free and unsupervised.) And only a week ago, they were told to ‘self-isolate’, with no quarantining at all!
    • I do wish that the government would stop picking on residential landlords. Exposing them to credit risk by saying they can’t evict tenants (as long as the tenants ‘try really hard to pay’), is manifestly incorrect. If they are denying us the right to defend our property right and collect rent, surely landlords should be getting an underwrite like the banks, for their government imposed exposure to the tenants’ non-payment? Why do bankers get their debt underwritten 80%, yet landlords get set up and backed into a corner to face a wall of credit risk on rent collection, without government support? One groups gets support on interest and principal payments, while landlords get shot again. It seems very unfair to me.

    Summary

    There is a lot of government support, and a lot you can do to get ahead of the curve on the post-lockdown economy. If you need help with anything discussed in this article, please contact us at GRA: [email protected], fill out our online form, or phone +64 9 522 7955.


Matthew Gilligan
Director
© Gilligan Rowe & Associates LP

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Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.
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