IRD will only remit interest (UOMI) for terminal tax after 7 April 2020 if a taxpayer was unable to make this payment on time due to COVID-19.
It means anyone who is accruing UOMI on unpaid tax from the date of their final provisional tax instalment – or earlier dates, for that matter – for the 2019 tax year will need to use Flexitax® to reduce their interest exposure.
IRD has issued guidance on how the remission of UOMI will work for provisional taxpayers impacted by COVID-19 under s183ABAB Tax Administration Act 1994.
This section will apply for provisional and terminal tax payments for the 2020 and 2021 tax years. It is for payments due after 14 February 2020.
IRD says it drafted these eight scenarios based on current law.
However, they may change due to the additional legislative changes proposed on 15 April. The Government will pass the Bill containing these measures under urgency today.
The department will add further scenarios and other information as and when they are identified.
That said, for the purposes of this article, we will focus on terminal tax for the 2019 year as TMNZ has been fielding several questions about this, and IRD also covers this in its guidance.
Please note the following assumes a taxpayer was using the standard uplift method to calculate their provisional tax payments, is liable to pay three instalments, and has extension of time to file their income tax return for the 2019 year.
RIT of less than $60,000
|If the taxpayer…||Then the taxpayer…|
|Falls in safe harbour* and therefore the remaining balance to settle the liability for the year is due and payable at their terminal tax date in order to avoid UOMI.|
Legislative reference: s120KE (1) and (2)(a) of the Act.
|Will be eligible for a remission of UOMI incurred after 7 April 2020 if they were unable to pay 2019 terminal tax by this date due to the impact of COVID-19.|
*To use safe harbour, a taxpayer with RIT of less than $60,000 must have paid all standard uplift instalments on time and in full, or had no obligation to pay provisional tax, for that year. Since the 2018 tax year, this provision has been available to individuals as well as companies and trust.
If a taxpayer fails to pay any uplift instalment on time or in full, they fall out of safe harbour and the rules in s120KBB (3) of the Act will apply.
This means if tax is underpaid at the date of their first and/or second provisional tax instalment, IRD will charge UOMI on the lesser of:
- The uplift amount due, less any payment made in relation to that instalment; or
- The RIT for the year divided by three, less any payment made in relation to that instalment.
At the date of the final instalment, IRD will charge interest on the remaining balance owing to settle the liability for the year.
RIT of $60,000 or more
|If the taxpayer…||Then the taxpayer…|
|Falls outside of safe harbour and therefore the remaining balance to settle their liability for the year is due and payable at the date of their final instalment* in order to avoid UOMI.|
Legislative reference: s120KBB (1) and (2) of the Act.
|WILL NOT be eligible for remission of the UOMI incurred between the date of their final instalment and 7 April 2020 on the remaining balance owing to settle the 2019 liability.|
This is because that portion of UOMI is not charged due to the late payment of the terminal tax.
They will only be eligible for a remission of UOMI incurred after 7 April 2020 if they were unable to pay 2019 terminal tax by this date due to the impact of COVID-19.
*In order for a taxpayer with RIT of $60,000 or more to only face UOMI from the date of their final instalment, they must make their standard uplift payments on time and in full at their first and second provisional tax dates for that year.
Again, the rules in s120KBB (3) will apply if they fail to do so.
Don’t forget Flexitax® if outside of safe harbour
A taxpayer accruing UOMI on underpaid provisional tax from ANY instalment date for the 2019 tax year can use Flexitax® to reduce this interest cost by up to 30 percent and eliminate late payment penalties.
That’s because Flexitax® allows them to apply backdated tax paid to IRD on the date it was originally due against their liability.
As such, IRD will treat the taxpayer as having paid on time once it processes this transaction, remitting any IRD UOMI and late payment penalties incurred.
Using this can also put someone back into safe harbour (assuming their RIT for the year is less than $60,000).
A taxpayer has 75 days from the date of their terminal tax date to use Flexitax® to settle 2019 income tax liabilities.