For many, the 28 August provisional tax instalment is the first for the 2020 tax year – and failing to pay on time will cost taxpayers more money.
That’s because the interest IRD charges when tax is unpaid or underpaid is increasing from 8.22 percent to 8.35 percent.
The new rate will apply the day after the 28 August provisional tax instalment is due.
Unsurprisingly, the rates adjustment is proving unpopular with accountants and taxpayers.
Many are criticising the increase as interest rates are trending in the opposite direction. (IRD says market conditions in April were the basis for the new rates.)
They also take umbrage that the interest differential between what the taxman pays if tax is overpaid and what they charge if tax is underpaid has increased in IRD’s favour.
Nonetheless, it does not change the fact that the cost of not paying provisional tax on time is going to increase.
Along with IRD interest, late payment penalties will also apply if a taxpayer does not pay on time.
IRD administers late payment penalties as follows:
- One percent the day after payment was due.
- An additional four percent if the tax (including late payment penalties) is still outstanding after seven days.
As such, it is important taxpayers pay 28 August provisional tax on time – and know their options if they cannot.
Tax pooling can help with 28 August provisional tax
If someone finds paying 28 August provisional tax problematic or has a better use for the money they have set aside for tax, don’t forget about tax pooling.
A tax pooling provider such as Tax Management NZ (TMNZ) deposits date-stamped tax into its IRD account on each provisional tax date for taxpayers wanting the option to pay in a manner or at a time that suits them, without having to worry about late payment penalties.
The taxpayer has some interest to pay – but it is less than what IRD charges them. A taxpayer can save up to 30 percent on IRD interest with TMNZ.
And unlike an IRD payment plan, there is no need to supply financial information. Approval is guaranteed.
Taxpayers entering an arrangement with TMNZ make their payments when it suits their cashflow and TMNZ allocates the tax they need to their required provisional tax date(s).
As the tax TMNZ is transferring to a taxpayer’s IRD account has been paid and date stamped as at the original due date, IRD treats it as if the taxpayer paid 28 August provisional tax on time when they complete the transaction. This, therefore, eliminates late payment penalties.
Anyone using the standard uplift, estimation or GST ratio methods to calculate their provisional tax can use tax pooling. However, those using the accounting income method cannot as legislation prevents them from doing so.
Feel free to discuss tax pooling with your accountant ahead of your 28 August provisional tax payment if cashflow is tight.