Here’s how you can delay paying 15 January provisional tax to free up working capital at a time of year when businesses are likely to need it most.
The early part of the New Year can be a challenging time for small and medium sized businesses.
Results from a poll conducted by the Employers and Manufactures Association showed that more than half the respondents experienced cashflow constraints between January and March.
There are a number of reasons why:
• Consumers are either enjoying their holidays or getting their finances in order following their Christmas spending.
• Earnings will be down if businesses shut during the holiday period.
• Some owners may have paid staff bonuses or holiday pay.
With that in mind, one can understand how having to make a provisional tax payment on 15 January might be a somewhat problematic for some.
But try telling that to Inland Revenue (IRD), which still expects this payment to be made on time and will charge taxpayers late payment penalties of up to 20 percent per annum and use of money interest (UOMI) of 8.4 percent if the tax is not received on time.
However, those who are currently feeling the pinch during what is a traditionally slow trading period for businesses can free up working capital by using tax pooling to defer their 15 January provisional tax payment to a time that suits them – without incurring IRD late payment penalties and UOMI.
This method is cheaper than using many other traditional forms of finance – rates at Tax Management NZ (TMNZ) start from below six per cent – and does not affect existing lines of credit.
No credit check or security is required.
The full amount of finance does not need to be paid back if less tax is owed than first thought. The finance arrangement can be easily extended as well.
How it works
Say you wish to defer a $5000 provisional tax payment for six months.
You would pay TMNZ a one-off, tax-deductible interest amount and TMNZ would arrange the $5,000 provisional tax payment on your behalf. The interest amount is based on the amount of tax financed and the period of maturity, so in this instance would be $145.
The provisional tax payment is held in an IRD account administered by the Guardian Trust. Guardian Trust instructs the IRD to transfer the tax into your IRD account when you repay the $5000 principal in six months’ time.
IRD treats the $5000 provisional tax as being paid on time once the transfer is processed.
TMNZ is New Zealand’s largest and oldest tax pooling company.
It has helped more than 25,000 small and medium sized businesses save more than $70 million in IRD compliance costs since 2003.