The growing prevalence of tax pooling

The growing prevalence of tax pooling

The growing prevalence of tax pooling TMNZ Blog

Best Practice 1

Just as Xero changed the way most businesses approach their accounting, Tax Management NZ (TMNZ) is transforming New Zealand’s tax landscape with tax pooling.

More and more companies are taking ownership of their tax through this innovative service.

Most of New Zealand’s top 200 companies use tax pooling and in the past 10 years, TMNZ has helped more than 21,000 clients save over $100 million.

However, many people mistakenly think tax pooling is just for the big guys, or it’s a hassle not worth the effort.

Traditionally TMNZ has worked with corporates and accountants, but TMNZ CEO Chris Cunniffe says we’re now seeing more queries coming from small- to medium-sized businesses, “because people are actively managing their business and they have a better understanding of their cashflow”.

Awareness has grown around tax pooling and the fact TMNZ gives free advice helps make it more accessible. With that knowledge a lot more people are proactively managing their tax bill rather than just leaving it to their accountant.

Which is why TMNZ created Pay My Tax, a handy app that’s very easy to use. The app can be downloaded to a mobile device and lets anybody pay their tax from anywhere – in an instant. Businesses can even shift the payment dates to a time that is better for the cashflow – and while they do so, they also avoid paying IRD’s interest or penalties.

“Businesses of all sizes and from all industries that want to manage their provisional tax more efficiently are using tax pooling. It’s cheaper than using a traditional business overdraft facility – and it’s tax deductible. There’s no need to do any credit checks or have face-to-face discussions with customers,” adds Cunniffe.

Interestingly, more people are also depositing in the TMNZ/Guardian Trust tax pool.

“It’s no longer perceived as the ambulance at the bottom of the cliff,” says Cunniffe. “Big accountancy firms like PWC and EY talk about tax pooling as Best Practice and now, more smaller accountant firms are doing the same.”

Virginia Stallard at Vision Accounting Solutions in Albany says, tax pooling has helped clients who couldn’t meet provisional tax instalments on the due date because of cashflow pressures. “The key is to buy tax now and pay later, when cashflow is better.”

Stallard recommends TMNZ to many of her clients, as does Mike Turner of Poulson Higgs in Dunedin.

“Clients just hate paying use of money interest. So anything that saves them money and removes that psychological hurdle they really love. Tax pooling does exactly that.”

Tax Pooling is a system established by the IRD in 2003 to manage exposure to IRD’s use of money regime.

In New Zealand, you must make three equal provisional tax payments a year based on what your profit will be at the end of the year. If you end up paying more than what’s actually needed, the IRD gives you a low interest rate. And if you pay less that what’s required, the IRD charge you high interest.

Whether  you overpay or underpay, it costs you money on top of the tax you owe. So tax pooling can give you a better deal. It lets the overpayers trade date stamped tax with the underpayers, to reduce interest costs of 8.4% or for a better return on money rather than having it sitting at the IRD earning just 1.75%.

The IRD is happy because they get paid on time and don’t have all the admin to think about.