Paying provisional tax: The ONE thing you must know

Paying provisional tax: The ONE thing you must know

Paying provisional tax: The ONE thing you must know 1200 630 Lee Stace

Paying provisional tax: The ONE thing you must knowMany a business owner is familiar with paying provisional tax. And the reason they are familiar with it is because they do not like paying it.

There are myriad reasons why.

But perhaps the biggest issue of paying provisional tax is the inflexibility of IRD. They want you to pay on the dates they set.  No ifs, not buts. These dates do not suit everyone. For instance, who was the bright spark who thought up having tax due on 15 January? Talk about one of the worst times of the year to have to pay tax.

Regardless, whether you are light on cash – or have a better or more urgent use for it – the general perception is you do not have a choice in the matter. Pay up or pay the price. And the price is harsh: IRD interest of 8.22 percent and late payment penalties.

The ONE thing you must know about paying provisional tax: Tax pooling

However, what if you did have a choice when it comes to paying provisional tax? What if you could do tax on your terms, so to speak, without facing IRD’s consequences? Do it my way, in the famous words of Frank Sinatra?

Well you can.

Not only that, but this choice has been available to provisional taxpayers in New Zealand since 2003. That’s right – 15 years.

It’s called tax pooling. What it does is allows businesses to manage cashflow by paying their provisional tax at a time or in a manner that suits them.

The best part? IRD is totally cool with it.

Paying provisional tax through a tax pooling provider such as TMNZ lets you pay what you owe at a time in the future that better suits your business or in instalments.

There is some interest to pay – but this is much lower than what IRD charges or what you will incur if you use your business overdraft or get an unsecured loan. It also wipes the late payment penalties.

All you have to do is tell the tax pooling provider the amount of tax that is due and when or how you would like to pay it. They take care of the rest and notify IRD of your arrangement. Easy-peasy.

Hang on – I’ve been paying provisional tax for donkey’s years. How come I haven’t heard of tax pooling before?

Good question.

The awareness of tax pooling at the top end of town and among accountants is generally very good. In fact, many consider it best practice.

However, when it comes to small businesses paying provisional tax, that message has only reached a, er, small percentage. (If your eyes are soaking up these words, you now know the service exists.)

Yet that is not to say an increasing number of small businesses and sole traders are not utilising the service. In fact, here’s how tax pooling has helped Barbers and Merchants owner Josh Monaghan manage his cashflow.

I have an accountant and they have never mentioned tax pooling before when paying provisional tax. What should I do?

Fire a rocket in their direction. Maybe consider getting a new accountant. Here are some of the tax agents TMNZ is currently working alongside. They all see the value tax pooling offers their clients.

If torpedo punting your current accountant to touch seems drastic – or you are genuinely ‘breaking news’ to them when you mention tax pooling – discuss it with them ahead of your next provisional tax instalment.

For most, this will be on 15 January – a problematic time for businesses when managing cashflow, according to Xero.

Better yet, point them in the direction of this easy-to-understand article on Newsroom or get them to download this free guide. Both will provide the relevant information as far as the nuts and bolts of tax pooling go.

Want to know more about tax pooling yourself?

If you want further information on tax pooling, check out these short videos about Flexitax® and Tax Finance.

Conversely, feel free to drop TMNZ a line if you have any questions. You can do so by phoning 0800 829 or emailing our Client Services Team.

Lee Stace

Lee Stace is the PR and Content Manager at Tax Management NZ.

All posts by: Lee Stace