Managing provisional tax payments to get a competitive advantage

Managing provisional tax payments to get a competitive advantage

Managing provisional tax payments to get a competitive advantage Lee Stace

Competitive AdvantageBusinesses do not have to pay provisional tax when Inland Revenue says they do. There’s a way for them to defer provisional tax payments to a more convenient time without incurring late payment penalties and use of money interest.

Picture this: two rival car grooming businesses based in the Auckland suburb of Penrose.

Let’s say one is called Superwash Car Services and the other is Deluxe Car Cleaning.

Both are small operations which offer the same services at the same price. Both face the same financial pressures at the same times of the year.

However, they are in good health overall. So good, in fact, both are on the verge of branching out to Botany.

There’s a slight conundrum, though: Inland Revenue (IRD) is expecting a provisional tax payment from each business. Normally this would not be a problem, but it just so happens the due date for this payment coincides with a time of the year where business is slower than normal.

Each has money available – but not enough to cover the cost of expansion and pay their provisional tax. It’s either one or the other.

Superwash Car Services plays it safe by delaying its plans to open in Botany for three months. The fear of being charged IRD use of money interest (UOMI) of 8.4 percent and late payment penalties of up to 20 percent per annum is enough to ensure it pays its provisional tax without fail.

Deluxe Car Cleaning, on the other hand, opts for a different course of action.

It takes advantage of a Tax Management NZ (TMNZ) product called tax finance, which allows it to defer its provisional tax payment to a more convenient time without incurring UOMI and late payment penalties from the IRD.

This means Deluxe Car Cleaning can use the money it would have otherwise paid to the IRD for provisional tax to open up shop in Botany.

By the time Superwash Car Services does the same three months later, it’s too late.

Deluxe Car Cleaning has already established itself as the numero uno car grooming operation in the area, capturing the market and making more than enough money to pay the provisional tax it owes.

How Tax FINANCE works

TMNZ pays provisional tax to the IRD for you, and you repay TMNZ at an agreed upon date in the future.

Businesses only pay the tax bill that is due at the end. There’s no need to pay back the finance if you don’t end up needing all the tax.

Tax FINANCE is cheaper than many other financing options – rates start below six percent – and does not affect existing credit lines.

No credit approval or security is required.

About TMNZ

TMNZ is New Zealand’s largest and oldest tax pooling intermediary, being established in 2003 by the man who developed and helped the IRD implement the tax pooling concept, Ian Kuperus.

Mr Kuperus was named one of EY’s Entrepreneurs of the Year following his work in the tax pooling sector.

TMNZ has helped more than 21,000 SMEs save more than $30 million on IRD interest and late payment penalties.

*This article appears in the June edition of NZBusiness magazine.