Terminal tax – what is it?
You may have heard your accountant or bookkeeper mention ‘terminal tax’ before, but what does it actually mean and why is it important to be aware of it?
Terminal tax is the difference between what you have paid to Inland Revenue (IRD) in provisional tax over the previous income year, and what it turns out you actually owe.
Why overdue terminal tax does not have to be terminal
You still have time to settle your 7 February terminal tax liabilities with IRD if you have not done so already.
Tax pooling can be used up to 75 days after your terminal tax date to purchase any underpaid 2014 income tax.
What tax pooling does is it will wipe any IRD late payment penalties and reduce interest costs by up to 30 percent.
Those who missed their 7 February terminal tax payment date can use tax pooling up until 15 April to settle underpaid income tax for the 2014 year.
What about 7 April terminal tax?
If your terminal tax date is 7 April, you have until 15 June to buy underpaid 2014 income tax from Tax Management NZ (TMNZ).
A business with terminal tax of $5000 due on 7 April would save $378 in late payment penalties and IRD interest if they bought this tax from TMNZ on 15 June.
How does tax pooling work?
Tax paid through a tax pool is transferable, so overpayers can sell any surplus tax to those which have underpaid.
Trading between buyers and sellers is a facilitated by a tax pooling intermediary. Tax pool funds are held at the IRD and overseen by an independent trustee.
A recent independent tax pooling review conducted by PricewaterhouseCoopers found the system is working efficiently and is valued by taxpayers.
As New Zealand’s oldest and largest tax pooling intermediary, TMNZ has helped more than 26,000 New Zealand businesses save more than $160 million in IRD compliance costs since 2003.