How to use provisional tax to grow business

How to use provisional tax to grow business

How to use provisional tax to grow business Lee Stace

New Zealand economic growth (300px)Tax pooling frees up the cashflow businesses need to take advantage of favourable economic conditions.

The business outlook for the coming year is positive, with reports indicating that 2015 will be another strong one for the New Zealand economy.

According to a survey conducted by the Employers and Manufacturers Association at the end of last year, 92 percent of respondents felt things would improve or stay the same in 2015, while 58 percent expected their business to grow during the next 12 months.

While the economy is still strong, business owners are likely to make hay while the sun shines and continue investing in their business.

Reinvesting into a business always sounds good in theory, but often cashflow constraints can halt plans to buy new machinery, equipment or other items.

However, a growing number of New Zealand businesses are easing cashflow pressure by using an unlikely source: provisional tax.

That’s right – businesses can free up working capital for reinvestment by using tax pooling to defer upcoming provisional tax payments to a time which suits them, without having to worry about being charged use of money interest of 8.4 percent and late payment penalties of 20 percent per annum from Inland Revenue (IRD).

Imagine what a business owner could do with additional money in their business right now if they had put in place an arrangement to pay their 15 January, 2015 provisional tax at a later date.

There are several advantages of using this IRD-approved method.

Rates are competitive compared to many other traditional forms of finance such as an overdraft or unsecured loan, with rates at Tax Management NZ (TMNZ) starting from less than six percent.

It only costs $287 to defer a $10,000 provisional tax payment for six months.

No security or credit check is required. Approval is guaranteed.

Businesses do not need to pay for all the tax financed if they end up owing less than first anticipated, while the finance arrangement can be easily extended.

How financing provisional tax works

To defer a $10,000 provisional tax payment for six months, businesses would pay TMNZ a one-off, tax-deductible finance fee and TMNZ would arrange the provisional tax payment on their behalf.

The finance fee is based on the amount of tax financed and the period of maturity, so in this instance would be $287.

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 $10,000 principal in six months’ time.

IRD treats the $10,000 provisional tax as being paid on time once the transfer is processed.