Why tax pooling was implemented

Why tax pooling was implemented

Why tax pooling was implemented Lloyd Evaroa

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When you consider the fees the IRD loses out on by allowing tax pooling, it’s hard to comprehend why it exists. What’s in it for them?

There are several reasons why tax pooling is advantageous to IRD.

To understand them you need to look back to when the use of money interest regime was introduced in New Zealand in 1997, to encourage taxpayers to pay their tax on time. If there were no interest penalties, taxpayers had no incentive to pay on due dates.

The interest rates that were set by Inland Revenue were initially incredibly high – and went as high as 14.69% for underpayments in July ’98. While it was effective in incentivising earlier payment of provisional tax, the interest rates raised eyebrows in the business community. The Government was consistently criticised for the harshness of the regime.

In response, they introduced tax pooling in 2003. That’s when Tax Management NZ (TMNZ) opened its doors.

Tax pools help taxpayers manage their costs by trading between the two general groups of taxpayers – the overpayers and the underpayers.

Apart from keeping taxpayers happy, the benefits of tax pooling to IRD include: reducing the administrative burden of chasing tax; having the assurance of getting paid on time and the ability to forecast income. Early collection of revenue to fun government activities is more important to IRD than earning interest. After all, the IRD is not a bank.

As New Zealand’s first and largest tax pooling intermediary, TMNZ maintains a close relationship with IRD. At a macro level, the company provides early insights that help Treasury see what the economy is doing – well in advance of actual final company results.

TMNZ has invested heavily in efficient systems and customer support services that allow greater flexibility while helping cash constrained companies manage their cashflow better through deferring their tax payments to a more convenient time – without incurring penalties. It would be nearly impossible for IRD to offer this kind of facility. TMNZ also offers tiered finance rates for tax, which the IRD (due to their sheer size) would find it very difficult to handle.

In a nutshell, tax pooling is great for New Zealand taxpayers, offering a range of services IRD cannot provide – at no cost to the taxpayer. Taxpayers enjoy the benefits of competition within the tax pooling scene.  So, tax pooling creates a win win situation for taxpayers and IRD. And that works extremely well.

For more information about tax pooling, check the website tmnz.co.nz or call 0800 829 888.