Declaration rules inadequate

The wage subsidies we are mainly concerned about are the main wage subsidy and the extension wage subsidy. Subsequent wage subsidies made some changes to the Declaration that were an improvement and are evidence of the problems with the first two wage subsidies.

The Declaration failed to include the main wage subsidy objective of Ministers that the wage subsidy was to be paid to struggling businesses during a shutdown to help them retain employees.  If this had been included, billions of dollars would not have been paid out or would have been repaid.

Auditor-General report May 2020

3.32   There were also some challenges communicating the requirement to comply with employment law and the eligibility criteria. Stakeholders we spoke with felt that communications about the purpose of the Scheme could have been clearer and more focused on the main objective of keeping people employed.

The Declaration signed by applicants required them to predict a one month decline in revenue in order to be eligible to apply for the subsidy. However, eligibility based on a prediction is meaningless and a separate matter to entitlement. No mention is made in the Declaration of how many weeks the applicant will be entitled to obtain or retain the wage subsidy for. If a beneficiary wrote on a form that they predicted that they would have no income for one year that would not entitle them to a Benefit for one year.

MSD 2022 affidavit

These wage subsidies were intended to support employers affected by COVID- 19 to retain employees and would be paid out to the employer in a lump sum payment for a 12-week period.

Auditor-General’s report on management of the wage subsidy.   May 2021

We recommend that, when public organisations are developing and implementing crisis-support initiatives that approve payments based on “high-trust”, they: 1. ensure that criteria are sufficiently clear and complete to allow applicant information to be adequately verified; and 2. put in place robust post-payment verification measures, including risk-based audits against source documentation, to mitigate the risks of using a high-trust approach.

3.17   The requirement for applicants to have taken active steps to mitigate the impact of Covid-19 on their business was not clearly defined. Some examples were provided – for example, engaging with their bank or drawing on cash reserves. However, these examples were limited, and employers were not required to make a statement about any active steps they had taken to mitigate the impact of Covid-19 on their business. 3.18 This requirement is important. It tests whether an applicant needs taxpayer funded assistance. There is a risk that some applicants who did not meet this requirement received payment. 3.19 However, this cannot be determined with any certainty because:

  • The definition of the requirement is unclear.
  • Applicants did not have to provide corroborative evidence at the time of application; and
  • We could not identify records that described any actions taken to conclusively verify whether this requirement was met.

3.20 In our view, if the Ministry of Social Development had required applicants to make a statement about what steps they had taken, they might have been more likely to comply with this requirement. As a result, there would have been information that could have been verified in any assurance work carried out after payment was made

COMMENT: The Declaration states, “before making your application for the subsidy, you have taken active steps to mitigate the impact of COVID-19 on your business activities (including but not limited to engaging with your bank, drawing on your cash reserves as appropriate, making an insurance claim)” It is quite clear that these actions should have been taken and were not examples of what could be done.

3.36 Although the declaration form was relatively clear, it was lengthy and contained a lot of information. It also changed between the different stages of the Scheme. 3.37 There is a risk that some applicants did not fully read the form or did not fully understand the obligations.

4.70 The reviews did not involve substantive review of documentary evidence, such as financial accounts. Most organisations prepare some form of financial statements. These, or similar supporting information, could have been asked for when an application for the subsidy payment was made (we understand that this was done by the Australian Government for its JobKeeper wage subsid) or as part of the post-payment review activity.

4.71 Not requesting this type of information before or after payment means that there has been no objective validation of an applicant’s compliance with the revenue reduction requirement. In our view, an audit should, as a minimum, include verifying the main eligibility criteria against relevant documentary evidence. This should have been done for a sample of applications. Given the significant amount of public money paid and the fact that audit work could be carried out after payment, this is an appropriate step to take. Recommendation 2 We recommend that, when public organisations are developing and implementing crisis-support initiatives that approve payments based on “high-trust”, they put in place robust post-payment verification measures, including risk-based audits against source documentation, to mitigate the risks of using a high-trust approach.

4.72 Inland Revenue told us that it followed this recommendation when implementing the Small Business Cashflow Scheme.

COMMENT: Business owners and executives should have had no problem reading and understanding the form, so this sounds like the MSD excuse for recipients’ failure to comply.

When the wage subsidy was announced it was clear that there could be creative ways to justify getting the subsidy while revenue actually remained about the same or increased over a period of months.  For example, if one third of invoices were deliberately not processed and sent out during one month due to the excuse of dealing with Covid-19 issues, this would mean a one third drop in revenue for one month so the business would qualify. There would be a one third increase the next month, but this would not count. In May 2020 we sent this information to the MSD but they did not take it into account when designing the wage subsidy extension and subsequent wage subsidies.

The MSD officials recommended an 8 week Extension Wage Subsidy immediately following the original 12 week wage subsidy. This was during a boom or catching up time for almost all businesses so very few who applied really needed the money. Some Christchurch professional firms and businesses we have a good knowledge of claimed and retained the extension wage subsidy.  They were paid for a total of 20 weeks but either did not need the subsidy or only needed it for 5 weeks.

Businesses signed a Declaration stating that they had suffered or were expecting a 30% or 40% drop in revenue and had no cash reserves and could not get assistance from their bank. They also had to give each employee details of the wage subsidy being requested for that employee and get their consent in writing. Recipients were required to notify the Ministry of Social Development within 5 working days if anything changed that affected their eligibility or entitlement to the subsidy and they were required to repay the subsidy if they were not entitled to retain it.  It does appear that most businesses did not fully comply with the Declaration they signed.  For a start, it would have been very difficult to talk to their bank about getting assistance and it might have been difficult to get all employees to give their written consent.

The MSD requires those receiving a Benefit to notify any change in circumstances and it sets out a long list of potential changes.

(Minister of Finance OIA February 2021)


Joint Report: Future of the Covid-19 Wage Subsidy Scheme

Survey data (Better for Business: Business Health Survey) suggests limited resilience for some businesses. 20% of businesses surveyed in September and October state they have no financial reserves, 29% have reserves to continue operating for only a few weeks, and 44% have reserves for a number of months.

COMMENT:  This indicates that most businesses do keep reserves but they still applied for the wage subsidy.

The MSD has repeatedly stated that ‘the vast majority of applicants for wage subsidies did the right thing and were paid correctly, but it is not clear what the right thing is’. They have refrained from saying that recipients complied with the Declaration they signed, and it seems obvious that most did not do this.

A clause in the Declaration allows the MSD to amend the Declaration at any time and at its discretion so it could retrospectively clarify the rules and add any new rules to ensure that required repayments are made.

(MSD OIA response 10 March 2021 correspondence letter)

  1. Why has the Declaration not been clarified or changed, as was agreed to by those who received the wage subsidy extension, in order to avoid widespread fraud?

“In the context of a high trust model, businesses were required to sign a declaration that they had met the scheme’s eligibility criteria. The declaration is extensive and includes an agreement that details in the application may be verified with other agencies, obligations in terms of use of the subsidy, and consequences of non-compliance. The declaration has been amended over time to ensure consistency with the policy intent of the wage subsidy and that businesses were committed to all necessary requirements.”

COMMENT: The Declaration did not comply with the wage subsidy objectives and policy advice and it was not amended to ensure that it was consistent with the policy intent.

  1. “The intent of the wage subsidy scheme was to support the public health response to Covid-19 and support businesses and employees through periods of economic shut-down and uncertainty.”

Q and A on MSD website

As an employer or self-employed person, what active steps do I have to take to mitigate the impact of Covid-19?

You must take active steps to mitigate the financial impact of Covid-19 on your business before you apply for a Covid-19 Wage Subsidy.

This could include:

  • activating your business continuity plan
  • drawing on your cash reserves (as appropriate)
  • making an insurance claim
  • proactively engaging with your bank
  • seeking advice from the Chamber of Commerce, a relevant industry association or the Regional Business Partner programme.

(Minister of Finance OIA February 2021)

Joint Report 27 November 2020

  1. Rules were drafted at pace in March with minor changes made since. This has led to some rules being ambiguous and subjective and guidance that is sometimes inconsistent. These issues have led to confusion among employers and employees, higher administration costs, lower enforcement ability and disputes.

Annex 2 – Key areas for more substantive changes in the longer term

  1. The wage subsidy has largely the same high-trust delivery model as when it was built `at pace’ in March 2020. There remain significant limitations to integrity processes and the ability to target support.

COMMENT:  The MSD ignored news media articles about abuse of the wage subsidy and how easy it was to create a drop in revenue.  The Declaration signed by applicants allowed the MSD to make changes to the rules but they have failed to acknowledge and correct the mistakes they made. None of the OIA documents have mentioned that the vast majority of businesses received the wage subsidy for many weeks when they were operating with normal or above normal revenue. Those who made a lot of money from the wage subsidy are not complaining so the easy option is to cover up what happened and avoid any extra work.


COMMENT:  Payments are now only made 14 days in advance which is a big improvement. The Declaration states that the 40% drop in revenue has to be for 14 consecutive days so this now matches the payment period and is a big improvement. There will not be overpayment of every recipient, as happened previously.  In this case, Auckland was only one week at level 3 so it appears that a business would not qualify if they had one week below a 40% revenue drop and one week of normal revenue.

Relatively little money has been paid out so this indicates that if the same rules had applied to the original wage subsidy, many billions of dollars would not have been paid out.

The following clauses are an improvement on the March 2020 wage subsidy Declaration.

  1. Your business meets the revenue decline test:
  2. Your business is being or will be affected by the move to Alert Level 3 on 28 February 2021; and
  3. Your business has had, or you are predicting will have, a decline in revenue [5] that is attributable to the effect the move to Alert Level 3 on 28 February 2021 has had on your business and that is:

of at least 40% over a period of 14 consecutive days between 28 February 2021 to 21 March 2021 (revenue test period), when compared to a typical 14-day consecutive period of revenue in the six weeks immediately prior to the move to Alert Level 3 on 14 February 2021 (default comparator period).

4.You will prepare and retain evidence to support this declaration, such as records that demonstrate:

how the decline in your revenue was attributable to the move to Alert Level 3 on 28 February 2021;

  • use the subsidy to meet your obligations in relation to this subsidy; and
  • repay any amount of the subsidy that is not required for these purposes and that cannot be used to support paying and retaining other affected staff.

The following clause was basically the same in the March 2020 Declaration.

  1. Repaying the subsidy

You agree to repay the subsidy or any part of the subsidy paid to you if you:

  • fail to meet any of the obligations about how you must use the subsidy; or
  • were not or stop being eligible for the subsidy or any part of the subsidy, including where you predict that you will meet the revenue decline test but, as a result of your actual revenue, you do or did not;
  • provide false or misleading information in your application; or
  • receive insurance such as business interruption insurance for any costs covered by the subsidy.

Staff instructions July 2021

Introduction to Wage Subsidy Schemes

  1. The New Zealand Government introduced the wage subsidy scheme to support businesses affected by the global impact of COVID-19 to retain employees. The Wage Subsidy Scheme is designed to:
  • support affected businesses to retain employees when Covid-19 restrictions impact revenue; and
  • help preserve employment connections between employers and employees and provide income for employees even when they are unable to work.

COMMENT:  Another confirmation that the main purpose of the wage subsidy was for employees to retain an attachment or connection to employers. Those working from home or in essential services or whose jobs were not at risk should not have been included in the payouts.

Scoop 9 May 2022 Government Press Release

Ministry of Social Development’s new report on who received the Wage Subsidy last year shows that it was of critical importance in helping our economic recovery from COVID-19.

“Our government has worked hard to cushion the impact of COVID-19 on businesses and people’s jobs and livelihoods. This new report shows that the wage subsidies served to protect jobs and support businesses that might otherwise have been lost,” Carmel Sepuloni said.

“While we have seen the number of people receiving a Main Benefit rise due to COVID-19, interventions like the wage subsidies and Government investment have meant the numbers are well below what was forecast,”

“We know that businesses right across the motu are what makes Aotearoa New Zealand tick. The wage subsidies have been an important tool in our toolbox in supporting them, and protecting people in nearly half of our jobs,” Carmel Sepuloni said.

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