How your tax bill can help you grow – by Dan Lowe in the April 2010 NZICA Journal
Tax pooling may offer ways to raise finance and take advantage of improving economic conditions, says Dan Lowe.
For most businesses, 2009 was a volatile and stressful period. Although it is too soon to say that the tough times are over, there are certainly indicative signs that the economy is in recovery mode – and let’s face it, if you have survived the last 18 months you are probably in a good position to take advantage of the imminent economic upturn. The lesser players in your market have been weeded out creating opportunities for those that remain.
Speaking to a range of clients and contacts, it appears that the main squeeze on expansion is the ability to access additional funds. Despite the improvement in the economic conditions, cash flow is still causing problems for kiwi businesses. There is no doubt that the lending conditions have permanently changed. Finance is not as freely available as it once was. Financial institutions are hurting from this recession, and this has resulted in a far more conservative lending approach. This impacts even the good banking clients who now face:
- extensive financial information requirements (increasing compliance costs) before an application will be considered
- higher interest margins
- higher loan to value ratios and security requirements
- onerous financial covenants
- banks simply declining to lend
An alternative option for raising finance comes from an unlikely source – your provisional tax payments. Tax pooling intermediaries operate “tax pooling” accounts with Inland Revenue. Businesses can deposit tax payments into these accounts instead of paying them directly to Inland Revenue and use them to satisfy their income tax obligations following completion of their tax return. Tax pooling accounts are now commonly used to reduce exposure to use of money interest, however fewer businesses are taking advantage of the tax pooling regime as an alternative and competitive source of financing.
So how can you use your income tax obligations as security to free up cash flow? You have an upcoming provisional tax obligation, but your cash flow is limited, or is required elsewhere within the business. You (through your tax adviser) approach a tax intermediary and seek finance for the tax payment (generally for periods between three and 12 months). The intermediary deposits the required amount in the tax pooling account (usually sourced from a financial institution with which it has an arrangement). Interest is payable by you to the intermediary at the commencement of the arrangement, with the principal payable on maturity (currently the interest rates range between 6% and 9%). Upon payment of the principal, the tax payment is credited to your IR account. Financing, through the use of your tax obligation as “security”, is a legitimate and very cost efficient option creating cash flow for your business because:
- pre approval is guaranteed – no credit checks
- no guarantees or security are required
- the rates available are often less than your existing finance rates
- in the event the tax is not required, you are not required to repay the loan
- tax intermediaries are approved by Inland Revenue and are backed by independent trustee companies
Cash is the lifeblood of every business – it is critical to business survival and prosperity in an economic recovery. If you find your tax obligations are limiting your ability to expand or placing undue pressure on your working capital requirements, this financing option may present a viable alternative to free up your cash flow – just think of it as putting your tax on layby. A range of service providers exist with new entrants expected in this market. This competitive environment ensures you are able to maximise any benefits from the use of tax intermediaries.
Dan Lowe is an Associate at Grant Thornton, Auckland. firstname.lastname@example.org