Small businesses who miss a repayment to the Inland Revenue on the new cashflow loan scheme could end up facing 10 per cent interest on the loans which are designed to help shore up the sector in the face of coronavirus.
The Small Business Cashflow Loan scheme opens to applications today in a move that will see Inland Revenue facilitate loans of up to $100k to businesses with 50 or fewer employees.
It will loan $10,000 to every firm and an additional $1800 per equivalent full-time employee, who meet the same qualifying criteria as the employer wage subsidy scheme.
The loans are designed to be interest-free if they are paid back within a year with 3 per cent per annum charged after that.
But just published terms and conditions reveal there are some fish hooks for borrowers.
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Repayment of the loans is not required for the first two years. But the documentation shows after two years Inland Revenue will set up a payment schedule and if borrowers miss a payment it will be considered an "event of default" allowing IRD to demand full repayment of the outstanding loan immediately.
Robyn Walker, a tax partner at Deloitte, said in the event of a default the interest rate on the loan would also increase from 3 per cent to 10 per cent.
This is because the loan default would attract an extra interest charge equivalent to the use of money interest rate on underpayments of tax which is currently 7 per cent.
"There are a number of situations where the loan can be thrown into default, so people need to enter the scheme knowing that the interest rate could actually be increased to 10 per cent."
Walker said anyone applying for the loan should also reconfirm their eligibility for the wage subsidy because if they have drawn down the loan and are subsequently found not to be eligible for the subsidy they will have to repay the loan.
"The key issue here will probably be for those who have applied for the wage subsidy on the basis of an anticipated 30 per cent reduction in revenue which has not eventuated."
A number of businesses have repaid the subsidy after finding this to be the case and the subsidy applications are still being audited by the Government.
As at April 21 the auditing had resulted in 56 applicants being asked to refund either all or part of their subsidy. A total of $1.25m had been requested from these applicants with $168,000 already refunded.
A further 1281 applicants had also voluntarily advised they want to refund all or part of the subsidy leading to $16.2m of refunds requested with $6.9m already refunded.
Walker said the loan also included a number of other undertakings including applications from a "natural person" including the requirement to stay in New Zealand other than for temporary absences like holidays.
"That is not necessarily unreasonable, however it is a lot more restrictive than, say, student loans."
Student loan borrowers - the only other loan scheme the IRD administers - are allowed to leave the country but have to pay interest on their loan if they are away for longer than six months. The loans are interest free if they stay in New Zealand.
Walker said the loan scheme also required IRD to be notified if the business or organisation ceased to exist.
"For self-employed people it may be important to consider this before making an application for a loan; for example, if a person moved back into an employment role and put their own business on hold, this could trigger a requirement to repay the loan."
While not included in the documents Walker said the loan should also only be taken if the business has "core operating costs" such as rent, insurance, utilities, supplier payments and rates that it needs to cover.
As such a self-employed person with minimal running costs probably should not draw down on the loans, she added.
The IRD can also change the terms of the loan contract with 30 days' notice and also has the ability to assign the loan to another party.
"Whether these events are ever likely to occur is unclear, but people need to be aware of the clauses."
The contract terms also provide the IRD with very broad powers to share information with other government departments and agencies.
The Government has said small businesses have a month to apply for the loans, although this could be extended.