Using tax pooling to defer untimely provisional tax payments can save farmers money, as it eliminates IRD late payment penalties and use of money interest charges. In this article, we look at how it might be of use to farmers who are wishing to reinvest in their business.
Farmer Joe has a conundrum.
Overall, business on his farm is heading in an upward trajectory and he is now in a position to reinvest in his operation. Replacing some of his old equipment with new machinery sits at the summit of his ‘wish list’.
However, Joe just so happens to have a provisional tax payment coming up soon.
Now he has money available. The problem is there is not quite enough to cover the cost of reinvestment and pay his provisional tax.
To further compound matters, Joe is entering a period were business is a little slower than usual.
Now most would take a conservative approach by putting their business reinvestment plan on the backburner and paying Inland Revenue (IRD).
The rationale for doing so is sound: being hit with late payment penalties of up to 20 percent per annum and use of money interest (UOMI) of 8.4 percent is usually enough to encourage people to pay the IRD on time.
Joe, though, uses an alternative approach.
He knows his cash balance will return to normal in six months’ time, when business picks up again.
With this thought fresh in his mind, he opts to use tax pooling to defer his provisional tax payment to a time that suits him – without incurring IRD late payment penalties and UOMI charges.
Using this method to finance his provisional tax payment enables Joe to better manage his cashflow, as he can use the money he would have otherwise paid to the IRD to reinvest in his business.
It also has other advantages:
- It is cheaper than many other traditional financing options and as it is not debt, it does not affect other credit lines.
- No approval or security is required.
- It is IRD approved.
- If you do not need all the tax you have financed, you do not have to pay for it.
- The finance can be extended at any time.
- It can be used at any provisional tax date.
Joe chooses to use a tax finance arrangement to defer his provisional tax payment for six months. His tax is paid – and he has new machinery to boot.
How does it work?
You pay a tax pooling intermediary a one-off, tax-deductible interest cost, which is based on the amount financed and period of maturity, and the intermediary pays provisional tax on your behalf.
For example, if you finance a provisional tax payment of $25,000 due on 28 August for six months it will cost you around $736.
This provisional tax payment is placed at the IRD on your behalf in an account that is administered by an independent trustee.
That independent trustee will instruct the IRD to transfer the tax into your IRD account when you pay the principal balance at the agreed upon time in the future.
IRD treats the tax as being paid on time by you, wiping any late payment penalties and UOMI incurred.
Using tax pooling to defer provisional tax payments is something worth considering ahead of your next provisional tax payment.
*This story featured in the 15 July, 2014 edition of Rural News (embedded below).