Terminal tax – it doesn’t have to be terminal

Terminal tax – it doesn’t have to be terminal

Terminal tax – it doesn’t have to be terminal Aaron Ooi

tax relief

In most people’s minds, 7 February 2014 looms as a big deadline for paying Terminal Tax.

At this point most taxpayers have learned their final tax position from their accountant. And they believe this is the drop-dead date to make final provisional tax payments to IRD, without incurring penalties.

But if you’ve missed your deadline you can use tax pooling to purchase tax for 2013 until mid-April. This relates to the IRD’s 75 day rule. The same goes for those people with the 7 April deadline for terminal tax payments. You can purchase tax right up until mid-June.

Terminal tax breathing space

This IRD approved, risk-free way lets you gain more breathing space for your Terminal Tax payment. By using a tax pooling facility, New Zealand law allows taxpayers to delay payment for up to 75 days after the terminal tax date.

A tax pooling product called Tax Finance gives provisional taxpayers the option to buy extra time so taxpayers can avoid the IRD’s high use of money interest or late payment penalties. Available by calling Tax Management NZ (TMNZ), taxpayers can just shift their terminal tax payment date out a couple of months.

Eliminating interest or penalties at terminal tax time

Terminal Tax is a top-up of tax that in most cases should have been paid on the three provisional tax payment dates during the year prior. Where this happens, a taxpayer may already be liable for IRD use-of-money interest on underpaid tax.

Many taxpayers pay provisional tax based on an estimate of their year’s income. An unexpected windfall or upturn in revenue can result in a liability for shortfall penalties on tax, even though the IRD payment date was some time prior to the revenue. Those who pay based on an uplift method (where you evaluate your tax payment based on 1.05% of your previous year’s tax bill) are less at risk, unless they do not pay to the full amount of the uplift. IRD late payment penalties can be onerous – one percent for a day late, and another four percent on top if the full payment is not received by IRD within the week.

TMNZ is registered with IRD and can arrange for taxpayers to make backdated tax payments to IRD. When this happens, IRD removes any interest and penalties levied, or any record that the taxpayer has previously underpaid.

Working with TMNZ

TMNZ understands the timing of a terminal tax payment can be problematic. At this time of year, taxpayers often don’t have the cash to pay their tax. Business demands – and opportunities – can constrain free cashflow, and short term finance rates can be painful.

Any taxpayer can use tax pooling to organise their Terminal Tax and to offset their tax payments. It’s not necessary to do this through an accountant, as TMNZ provides free advice on tax payment options and solutions – it’s our business.

Once you know your final tax position, it is smart to contact TMNZ immediately. We will advise the IRD of your situation and allow for the payment extension without penalties. And for those who miss the payment on their terminal tax date – you can do a top up if you are within the 75 day window… and if you act fast!

How tax pooling works

Thanks to the efforts of an innovative tax accountant, Ian Kuperus (the founding director of Tax Management NZ), the legislation changed in 2003 to allow tax pooling intermediaries to manage payments on behalf of taxpayers. For this to occur, taxpayers need to pay their tax through the tax pooling intermediary.

Clearly, this requires a high degree of trust and security for taxpayer funds. TMNZ structures its operations so that the tax is held in a separate ‘tax pool account’ at the IRD, administered by the Guardian Trust. All funds are managed by Guardian Trust, and are not accessible directly by TMNZ. Beneficial ownership of the tax remains with the taxpayer.

Tax paid to the tax pool retains the date stamp at which it was first paid to the tax pooling account – and can be bought and sold just like any other commodity. Taxpayers can sell their overpayments of provisional tax to taxpayers who have underpaid. In this way, the original overpayer earns a return higher than the use of money interest they would have received from IRD on an overpayment.

Conversely, taxpayers can buy tax that has been previously deposited into the tax pool. This is then transferred to their individual account at IRD at the original date stamp – thereby eliminating any IRD use of money interest or penalties that have accrued.

For more information, call TMNZ now on 0800 829 888 to talk through how we can help you.