Provisional tax relief during tough times

Provisional tax relief during tough times

Provisional tax relief during tough times 1200 630 Lee Stace

As businesses look to conserve cash in response to drought, flooding or coronavirus, there’s an IRD-approved way to defer payment of their 2020 provisional tax until June next year.

Tax pooling lets taxpayers pay provisional tax at a time that suits their business, without facing interest and late payment penalties from the taxman.

Why might this be useful?

For most businesses, provisional tax for the 2019-20 income year will be calculated at 105 percent of the preceding year’s income tax liability.

But with the situation in China and adverse weather events in some parts of New Zealand, profitability may in some cases be less than forecast and some will not wish to pay based on this calculation. Others may also wish to hold onto funds to manage their cashflow at this uncertain time.

How tax pooling helps

A commercial tax pooling provider such as Tax Management NZ can offer some respite.

It allows someone to pay provisional tax at a time that suits their business. You will only have to pay what you owe IRD, not some amount calculated by reference to prior years which may be well in excess of your 2020 liability.

Using a tax pooling provider means those due to pay provisional tax on 28 February, 28 March or 7 May 2020 would have until 21 June 2021 to pay.

There is some interest to pay when using the service, but this is much cheaper compared with the 8.35 percent IRD currently charges when a tax payment is missed or underpaid.

Things to know about tax pooling

  • Tax pooling providers are approved by and registered with IRD and operate under legislation found in the Income Tax Act 2007 and Tax Administration Act 1994. The service has been operating in New Zealand since 2003.
  • Any payment made to a tax pooling provider is made into a bank account administered by an independent trustee. This independent trustee also oversees a tax pooling provider’s account at IRD.
  • There is no requirement to provide any security or financial information to use the service.
  • Tax pooling cannot assist with GST or PAYE. It’s important to stay on top of these tax obligations during this time.

How tax pooling works

Say you have a provisional tax payment of $30,000 due on 28 March 2020. With the uncertainty given recent events, you would rather not pay this right now if it can be avoided.

If you let a tax pooling provider know about your position, they can make a tax deposit of $30,000 into its IRD account on 28 March 2020 on your behalf. This deposit is date stamped as at the date that it is made.

The tax pooling provider will also tell IRD you are using tax pooling to pay your tax and IRD will enter a note in its system telling its debt collection team not to pursue the outstanding payment.

Once you file the tax return and know the liability for the year, you pay the tax pooling provider. This payment must be made before June 2021. Your payment includes the core tax of $30,000 plus the provider’s interest cost. The cost to defer $30,000 for 15 months is $2151.

If it turns out the actual liability for the year is less than the date-stamped deposit made on your behalf, don’t worry. You only pay for the tax you require, and the provider’s interest will be recalculated to reflect this.

Upon receiving your payment, the tax pooling provider transfers the deposit it is holding on your behalf from its IRD account to your IRD account. IRD will treat it as a payment made on time by you and will wipe any interest and late payment penalties they may have put on your account.

The savings

Below is a cost comparison of not paying IRD until June 2021 or using tax pooling to defer the payment until then.

  Not paying prov. tax to IRD until June 2021 Using tax pooling to defer prov. tax payment until June 2021
Tax amount $30,000 $30,000
Interest $2998 $2151
Late payment penalties $1512 $0
Total cost $34,510 $32,151

As you can see, tax pooling delivers a saving of $2359.

We recommend you speak with your accountant or tax adviser about tax pooling if you have any questions.

Lee Stace

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

All posts by: Lee Stace