Provisional taxpayers cannot use the safe harbour provision if they fail to make their standard uplift payments on time and in full.
However, tax pooling can fix this.
Safe harbour – what it is and the criteria
Safe harbour is a concession whereby IRD will not charge interest between a taxpayer’s final provisional tax instalment and their terminal tax date if they underpay their income tax for that year.
Any final balance to settle what they owe for the year will be due at their terminal tax date. Interest only applies from this date if a taxpayer does not pay by then.
For the 2018 tax year onwards, safe harbour is available to individuals as well as companies and trusts.
In order to enjoy this interest concession, a taxpayer must:
- Pay their provisional tax payments on time and in full using the standard uplift method (or have no obligation to pay provisional tax for the year); and
- Have an income tax liability for the year of less than $60,000; and
- Not use the estimation, GST ratio or accounting income methods to calculate their provisional tax payments for the year.
You can find the criteria in s120KE (1) Tax Administration Act 1994.
When a taxpayer fails to pay uplift
If a taxpayer does not pay the uplift amount due on time, they fall outside of safe harbour. If they pay on time – but the amount they pay is less than uplift – they suffer the same fate.
Please note this differs from the previous safe harbour concession that applied prior to the 2018 tax year.
Under the old concession, there was no requirement to pay the uplift amount on time and in full. This was also only available to individuals with an income tax liability of less than $50,000.
Taxpayers who do not meet the safe harbour criteria will be subject to the rules that apply for other standard uplift taxpayers.
As such, they will incur IRD interest from their final instalment date on the outstanding balance to settle their liability for the year.
If uplift was not paid on time or in full at the first or second instalment, then they will also be liable for interest from this date on the lesser of:
- The uplift instalment due, minus the amount they paid in relation to that instalment; or
- The actual income tax liability divided by the number of instalment dates for the year, minus the amount they paid in relation to that instalment.
You can find these rules in s120KBB of the Act.
Tax pooling puts taxpayers back into safe harbour
In the event a taxpayer misses or underpays any uplift instalment, they can use tax pooling to retrospectively meet the safe harbour criteria.
This is done by purchasing from a registered tax pooling provider such as TMNZ surplus tax paid to IRD on the date it was originally due and applying this against their liability.
To fall back into safe harbour, a taxpayer simply purchases the amount of tax they need to satisfy the uplift instalment obligation they have missed or underpaid.
As the tax the taxpayer is purchasing from the tax pooling provider is date stamped as at the original date it was due, IRD treats it as if the taxpayer paid their provisional tax on time when it processes this transaction. This eliminates any late payment penalties.
The taxpayer has some interest to pay – but this is cheaper than what IRD charges for a missed or underpaid provisional tax instalments. TMNZ offers savings of up to 30 percent.
A quick recap
Standard uplift taxpayers with RIT of less than $60,000 who wish to use safe harbour must pay their uplift instalments on time and in full.
Failure to do this means they will incur IRD interest from the final instalment date on the final balance to settle what they owe, as well as from the instalment date where they did not pay uplift.
Tax pooling lets taxpayers meet their uplift instalments on time and in full retrospectively, meaning they can enjoy the safe harbour interest concession.