A legislative amendment will allow taxpayers to remain in safe harbour if they underpay their provisional tax instalments by $20.
Smaller taxpayers using the standard uplift method to calculate their payments have been losing the ability to take advantage of the interest concession provided by this rule when they underpay by small amounts.
When this happens, they incur IRD interest from the date of their final instalment for that year on the remaining balance owing to settle their income tax liability.
Under safe harbour, though, the remaining balance is not due until the taxpayer’s terminal tax date. Interest only applies from after this date if that amount is still outstanding.
TMNZ has seen several smaller taxpayers facing a huge interest cost when losing the protection of safe harbour for underpaying by $1.
That’s ‘disproportionate to the error made’
In a report to the Finance and Expenditure Committee summarising the submissions received on the Taxation (Kiwisaver, Student Loans and Remedial Matters) Bill, IRD acknowledges this unintended consequence is having unfair financial ramifications for taxpayers.
As such, it is introducing a tolerance threshold of $20 or less per instalment for taxpayers who otherwise meet the safe harbour criteria to ensure they are not subject to interest due to a small payment shortfall.
“Some issues have arisen the result of which is that a small underpayment is providing an adverse result to taxpayers that is disproportionate to the error being made,” says IRD in its report.
“It is proposed that a tolerance be included in the legislation to deal with these issues. This tolerance will allow taxpayers to retain the benefits of the safe harbour even though they underpaid by a small amount.
“This will ensure that a person who underpays by small amounts will not be disproportionately penalised for that omission.”
However, the tolerance will only apply to taxpayers who make their provisional tax payments on time. They will still fall out of safe harbour if they fail to do so. That’s important to note.
Be that as it may, tax pooling can retrospectively put a taxpayer back into safe harbour if they pay late.
IRD says the new rule will apply retrospectively from the 2017-18 tax year onward.