Although small and medium-sized exporters face uncertainty around sales and costs, and the challenges of a high New Zealand dollar, Inland Revenue expects them to pay provisional tax on time. Using tax pooling to defer these payments can eliminate late payment penalties and use of money interest and alleviate cashflow concerns.
Here is a scenario New Zealand exporters may relate to: a boutique manuka honey producer has been turning a tidy profit in recent years selling his product in Southeast Asia. People over there cannot get enough of the gold stuff.
Recently, however, his cashflow has been tight due to seasonal sales and a volatile New Zealand dollar. In addition, some clients are late with their payments.
Payment terms for foreign customers who cannot pay on time have been adjusted so they can pay over a longer period of time or when the exchange rate is friendlier.
It is an annoying situation for the exporter. His order book shows he is earning income – but he does not have the cash in his accounts to show for it.
Things are about to get worse for him: he needs to pay provisional tax soon.
The exporter knows he can ill afford not to pay Inland Revenue (IRD). After all, he will be charged late payment penalties of up to 20 percent per annum and use of money interest (UOMI) of 8.4 percent should he not pay on time.
But he simply does not have the cash right now to settle this liability and will not be in a position to do so for another three months, when one of his major customers pays him.
The exporter is already carrying high levels of debt. Using his overdraft or credit card to pay the provisional tax is simply too expensive.
Things look bleak.
However, the exporter then discovers a Tax Management NZ (TMNZ) product called Tax FINANCE.
This allows him to defer his untimely provisional tax payment to a time that suits him, without incurring IRD late payment penalties and UOMI.
The exporter discovers there are other benefits of using Tax FINANCE:
- It is cheaper than many other traditional financing options – TMNZ’s rates start below six percent – and does not affect other credit lines.
- No approval or security is required.
- If he ultimately does not need the tax he has financed, he simply does not have to pay for it.
- The finance term can be extended at any time.
These benefits appeal to the exporter.
He uses tax pooling to delay his provisional tax payment for three months, when his major customer pays him, and then repays the finance.
How did the exporter do it?
The exporter paid TMNZ a one-off, tax-deductible interest cost, which is based on the amount financed and period of maturity, and TMNZ arranged the provisional tax payment on his behalf.
His provisional tax payment is placed at the IRD in the account of an independent trustee, the Guardian Trust.
Guardian Trust instructs the IRD to transfer the tax into the exporter’s IRD account when he has paid the principal.
IRD treats the tax as being paid on time by the exporter.
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.
It has helped more than 21,000 SMEs – a number of whom are exporters – save more than $30 million in IRD interest compliance costs.
Whether they face uncertainty around sales and costs, are affected by the volatile exchange rate, want to increase stock ready for export or are looking to grow their business, exporters who use Tax FINANCE say it helps them better manage their cashflow.
Contact TMNZ on 0800 829 888 or email email@example.com for further information.
*This article appeared in the July/August edition of Exporter magazine.