How filing late and losing EOT impacts provisional tax payments

How filing late and losing EOT impacts provisional tax payments

How filing late and losing EOT impacts provisional tax payments 1200 630 Lee Stace
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Losing extension of time (EOT) due to filing income tax returns late means someone can only use 105 percent of the previous year’s residual income tax (RIT) when calculating their provisional tax payments.

That’s because if a taxpayer fails to provide their returns(s) on time, IRD’s system defaults to using the date by which they were legally due to file the return for that year – not the date on which they furnished the return.

Only if someone files their return(s) within the required timeframe will the actual date of filing be used.

This is important to remember, particularly when using TMNZ’s Tax Calculator.

An overview of IRD’s system and TMNZ’s Tax Calculator

When a taxpayer files their return for the most recently completed year, IRD’s system uses the lesser of standard uplift or a third of their RIT to determine the provisional tax instalment amounts due and payable for that year.

As per s120KBB (3B) Tax Administration Act 1994, the standard uplift instalment can either be the lesser of the 105 percent or 110 percent calculation. You can read more about that here.

TMNZ’s calculator follows the same logic as IRD’s system.

To determine the instalment amounts due and payable, it requires a taxpayer’s RIT and filing date information for the past three years:

  • The current tax year or most recently completed tax year (e.g. 2020).
  • The tax year prior to that (e.g. 2019).
  • The tax year two years prior to that (e.g. 2018).

Whereas IRD has access to this information, we unfortunately don’t. That’s why we ask users to enter these details themselves.  

If someone was late in providing a return and lost their EOT in any of the years before the current or recently completed tax year, then it’s crucial they know the correct filing date to use, otherwise the calculator will spit out incorrect instalment amounts.

After all, garbage in, garbage out.

Example

A taxpayer with a 31 March balance date decided to use TMNZ’s Tax Calculator to work out the provisional tax payable for the 2019 tax year. They did not pay any income tax for that year and wanted to purchase it from TMNZ to reduce their interest cost and eliminate late payment penalties.

RIT and filing date information for the past three years
Tax YearRITEOTLegal date by which they must file their returnDate they file their returnReturn status
2017$6000Yes31 March 20181 May 2018Late
2018$10,000No7 July 201816 January 2019Late
2019$25,000No7 July 201930 June 2019On time

As you can see, the taxpayer has lost their EOT for the 2018 tax year due to filing their 2017 return late. Their 2018 return was also late, so they don’t have EOT for their 2019 tax year either. However, the taxpayer did file the latter year’s return on time.

This means when using TMNZ’s Tax Calculator they must enter into the ‘date of filing’ field the respective legal dates by which they were required to furnish the returns for the 2017 and 2018 tax years.

For the 2017 tax year, this will be 31 March 2018 as their EOT was still applicable.  For the 2018 tax year, this will be the non-EOT deadline of 7 July 2018.

Legislation states anyone who has an early balance date (i.e. the period between 1 October and 31 March) must file their return by 7 July if they do not have EOT. Those without EOT who have a late balance date (i.e. the period between 1 April and 30 September) must file their return on the seventh day of the fourth month after their year-end.

As the 2019 tax return was provided within the mandatory timeframe, the taxpayer can use the actual date on which they submitted that year’s return to IRD.

Recap: How things should look in TMNZ’s Tax Calculator
Tax yearRITDate of filing
2017$600031 March 2018
2018$10,0007 July 2018
2019$25,00030 June 2019

How this impacts provisional tax instalments

In this situation, the 2019 provisional tax instalments will be based on the standard uplift amount as this is lower than a third of the RIT for that year.

However, ALL uplift payments will be based on 105 percent of the 2018 RIT.

That’s because the taxpayer lost EOT for the 2018 tax year and, therefore, was supposed to have filed their return for that year on 7 July 2018 – before the date of their first provisional tax instalment for the 2019 tax year (this being 28 August 2018).

As such, they cannot base any payments off 110 percent of their 2017 RIT.

Therefore, the 2019 instalment amounts due and payable as per IRD’s system – and what TMNZ’s Tax Calculator will tell them to purchase – at each date are as follows:

  • 28 August 2018: $3500
  • 15 January 2019: $3500
  • 7 May 2019: $3500

TMNZ’s calculator will also show the taxpayer needs to purchase at their terminal tax date the final balance of $14,500 to settle the 2019 RIT, as their RIT is less than $60,000.

Please note the terminal tax date will have been 7 February 2020 due to them losing their EOT. They would have had 75 days from this date to purchase from TMNZ the 2019 income tax they require.

Don’t forget the flow-on effect

It is also important to remember that because there was a requirement to file the 2019 return by 7 July 2019, the taxpayer can only use the 105 percent uplift calculation for their 2020 provisional tax payments.

Again, this is due to the filing date for the 2019 return being before the first instalment date for the 2020 year.

So, using the RIT information above, the standard uplift payments for the 2020 tax year will have been:

  • 28 August 2019: $8750
  • 15 January 2020: $8750
  • 7 May 2020: $8750

For those using the standard uplift method, the 105 percent calculation will continue to be the only option for them to determine provisional tax payments until the taxpayer re-applies for their EOT.

Legislative references

You can find the legislation pertaining to filing dates of tax returns and EOT in s37 and s38 Tax Administration Act 1994.

Please feel free to contact us if you have any questions.

Lee Stace

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

All posts by: Lee Stace

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