Meet Andy. He is a builder who has run his own business for almost three years, with the current year reflecting he will make a substantial profit. He gets paid well and is smart enough to set aside the tax he owes with every cheque. However, the clients he is working for do not always pay him on time. The impact of this is not a positive one.
Eventually Andy experiences a cashflow issue. He is making a profit, but because he doesn’t have the necessary funds in his bank account, he is no longer able to pay the right amount of provisional tax to Inland Revenue when this is due. What is Andy supposed to do? Is he supposed to simply bear the penalties and use of money interest he had incurred as a result of his missed or underpaid obligations?
If you were living in the 1990s then you would be right to believe that Andy would need to pay it all (including penalties and interest). Lucky for him though, it is 2019 and tax pooling has been operating in New Zealand for the past 16 years.
Andy’s accountant, Matthew, knew tax pooling was a way for Andy to relieve some of the pressure he has been facing.
He decides to create a list of four reasons why Andy should use tax pooling as a way to cover his obligations with IRD. Here’s what they are:
Tax pooling creates a better environment for taxpayers
The first thing Andy asks is: “What is tax pooling and how does tax pooling work?”
The main benefits are:
- Taxpayers can choose to pay their liabilities in the time and manner that suits them up, without having to worry about IRD interest and penalties.
- Taxpayers can save up to 30 percent on use of money interest charged and eliminate late payment penalties if they miss or underpay provisional tax or if they are reassessed by IRD.
- More time to pay.
- There is potential to earn above IRD’s credit interest for payments made into the TMNZ tax pool at IRD.
Tax pooling in NZ began in 2003 when Tax Management NZ (TMNZ) became a registered provider with IRD.
Matthew assures him that all payments made into TMNZ’s tax pool account at IRD are managed by an independent trustee, Guardian Trust. They oversee bank accounts into which taxpayers make their payments as well as the transfer of funds from the TMNZ tax pool to Andy’s IRD account.
Because the tax being transferred has been paid and date stamped as at the original due date, once the payment is processed by IRD, any penalties and interest are wiped.
Companies of all sizes can use tax pooling
The benefits of tax pooling does not discriminate. It will help companies with a hundred-plus employees or a sole trader. The TMNZ tax pool is the largest and most established in the country.
In Matthew’s research, he found two companies TMNZ has helped: Walker & Co and Jucy Group Rentals.
Walker & Co use tax pooling to counteract the impact of seasonal business. Says co-owner Lee Walker: “It takes away all those stresses. You’re passing it on to somebody else and saying ‘take care of this for me, I don’t know what to do, we’ve got a shortage of cashflow’ and it’s the best way of putting more energy into your business and doing the things that you’re good at.”
You can read more about how TMNZ benefits their company in this blog.
Jucy Group Rentals’ day-to-day operations depend highly on if cash being available. Company CFO Jonathan Duncan says: “With a business like ours, we are investing quite heavily into assets…like cars, campers, building a boat, building the snooze. Cash upfront is important [for] us to have.”
Tax Management NZ has become part of the day-to-day operations of both companies, as it frees up working capital and mitigates penalties on their account.
“What is the cost of this? Andy asks.
“Just TMNZ interest.” Matthew replies.
Tax pooling is available for income tax and in cases of a reassessment
Matthew is looking through all his expected outgoings for the year. These range from the conventional cost of living through to all other expenses associated with owning a business. He realises that in the year prior to being hired, Andy made a mistake on one of his returns and therefore now has to file a voluntary disclosure with IRD.
“How can Andy get ahead with the current year if he now has to pay an additional amount of tax for a past year?” Matthew wonders.
TMNZ can assist taxpayers who owe an increased amount of tax as a result of a voluntary disclosure or audit. Tax pooling provides an additional 60 days from the date the IRD reassessment notice was issued to purchase what he needs and send it to IRD. The different tax types available to purchase are historic income tax payments, deferrable tax and agreed delay tax as well as other tax types such as GST, RWT, PIE, FBT, NRT and DWT.
To answer Matthew’s question, he can use TMNZ to reduce the interest and late payment penalties cost of Andy’s voluntary disclosure. For the current tax year, Matthew can set up either a Flexitax® or Tax Finance arrangement to give him more flexibility and time to pay (up to 75 days past his terminal tax date for that year).
Financial risk is better managed
Matthew has other clients that are medium-large taxpayers with big paydays. The TMNZ product to help them is a Tax Deposit.
The benefits of depositing into the tax pool on provisional tax dates are numerous:
- Excess funds paid into the pool can either be used for future dates and any other tax type where a reassessment has not been issued.
- There is an option to sell the surplus of tax to a taxpayer who has underpaid to earn additional interest.
- The refund process is much faster (within three to five days, and without having to file a return for the year).
Here at Tax Management NZ, we offer control over tax payments. There is another way to meet tax obligations without having to pay the IRD when it says so.
Now it is understandable to think this whole tax pooling thing is too good to be true but it is true.
Our products are designed to offer a solution around any financial situation. If you are new to the provisional tax paying scene then there are tools available for education through our website such as the provisional tax guide or the tax pooling calculator on the dashboard.