For Matthew Fleming, provisional tax is risky business as it requires a degree of crystal-ball gazing and guesswork.
However, he chooses to mitigate that risk by depositing these payments into Tax Management NZ’s tax pool account.
It’s a “no-brainer” because it gives him a better return if he overpays provisional tax and reduces his interest and late payment penalty costs if he underpays.
More about Matthew Fleming
Matthew is the chief financial officer at Harrison Grierson, one of New Zealand’s leading engineering and design consultancies.
It has offices throughout Aotearoa and predominately provides services locally, with more than 350 staff on the books.
Remarkably, the firm is blowing out 135 candles this year. No-one stands the test of time for that long if they ain’t good at what they do.
And Harrison Grierson is good at what it does. A quick peruse of the significant projects is has been associated with during its lifetime is a testament to that.
Provisional tax is ‘difficult to predict’
However, like most businesses, it is not immune to the problems provisional tax poses.
Matthew admits calculating the amount of income tax Harrison Grierson must pay IRD requires guesswork as its cashflow is up and down at certain times.
He knows the lay of the land during the first quarter – but the rest of the year can go either way.
“It’s hard enough to try and guess next month’s results, but when you’re having to guesstimate your final year’s tax liability accurately, [it] does take a certain degree of crystal-ball gazing,” says Matthew.
“We try to project our income and where our costs are going to be and having to pay tax on that sort of basis is a little bit of a risk.”
Even more so when one considers the taxman’s wide interest spread. They charge 8.35 percent if someone underpays provisional tax and pay just 0.81 percent if they overpay.
In other words, provisional tax is difficult to get right and very expensive when someone gets it wrong.
How Matthew manages that risk
Matthew chooses to deposit Harrison Grierson’s provisional tax payments into TMNZ’s tax pool.
It’s an account operated by an IRD-approved tax pooling provider that allows taxpayers to combine their payments. The overpayments from some can then be used to offset the underpayments by others.
TMNZ’s tax pool account sits at IRD and is overseen by an independent trustee.
Harrison Grierson keeps its date-stamped tax deposits in this account until Matthew confirms its liability for the year. He then arranges for the transfer of these deposits to the firm’s own IRD account to satisfy what they owe.
If they have surplus tax remaining, he can earn additional interest by selling this to someone who has underpaid. (This is subject to market demand, which has been severely impacted by the COVID-19 pandemic.)
Conversely, if not enough tax has been paid, Matthew can reduce the IRD interest cost and eliminate any late payment penalties Harrison Grierson faces through purchasing the tax they require from another taxpayer and applying it against the company’s own liability when he arranges their transfers from the pool.
Matthew: ‘TMNZ makes provisional tax easier’
Matthew is a big proponent of the benefit TMNZ delivers when his provisional tax calculations go askew.
“[Tax pooling’s] such a great service in terms of advantaging taxpayers when they are trying to estimate their liabilities and are struggling with it,” he says.
“The ability to get a return when you have overpaid and the ability not to pay such punitive penalty rates when you have underpaid makes it a no-brainer.”
As someone who is having to estimate revenue and costs a lot, Matthew finds it useful that tax pooling gives him the flexibility and control to make payments “as we see fit” based on how the financial year is unfolding, without any considerable downside.
He also likes that he can access refunds faster – and without having to file a return. TMNZ makes it simple for him to manage the payments of the different entities belonging to Harrison Grierson as well.
Matthew recommends tax pooling to other businesses, particularly those with seasonal or volatile income.
“What makes Tax Management NZ an easy choice is it makes the whole provisional tax regime easier to deal with.”
Watch Matthew’s interview below: