Updated 11 August 2020
Small- and medium-sized taxpayers may no longer have to pay interest if they underpay provisional tax as a result of miscalculating the impact COVID-19 has on their profitability for the 2020-21 income year.
However, while this concession is a major boon ahead of the 28 August 2020 payment date for those strapped for cash in the wake of the global pandemic, it is subject to meeting certain criteria.
Someone must be able to prove to IRD that any underpayment(s) that arise from getting their forecast wrong was due to an unforeseen change in circumstance that was out of their control – IRD calls this the ‘who would have thought that would happen?’ test – not human error, before the tax department will exercise its new discretionary power.
A taxpayer won’t be able to benefit from this concession if they make no effort whatsoever to forecast their liability.
Background – how it will work
The provisional tax interest remission was part of the COVID-19 Response (Further Management Measures) Legislation Bill (No 2) that was passed under urgency in Parliament this week. Please refer to schedule 2 of the Bill.
It’s available to taxpayers who:
- Use the standard uplift or estimation method to calculate their payments;
- Have an income tax liability for the 2020-21 year of less than $1 million;
- Are not using the temporary tax loss carry-back scheme; and
- Their ability to make a reasonably accurate forecast of that year’s income tax liability on one or more of their provisional tax instalment dates was significantly adversely affected by COVID-19.
Under proposed new section 183ABAC Tax Administration Act 1994, someone who meets the criteria above can ask IRD for a remission of any interest that has accrued before their terminal tax date on underpaid tax for the 2020-21 income year.
If the taxpayer asks for the relief as soon as practicable after filing their return for that year, IRD may agree to waive interest on any shortfalls if it is satisfied the provisional tax they paid was a fair reflection of how their business was performing at the time.
It applies for interest accrued on underpaid tax amounts between 31 March 2020 and someone’s terminal tax date for the 2020-21 income year (both dates inclusive).
Normal interest rules will apply for those who are not eligible for this concession. These will differ depending on whether a taxpayer uses the standard uplift or the estimation method to calculate their 2020-21 income year payments. Please be aware of that.
How does s183ABAC differ from s183ABAB?
Section 183ABAC of the Act deals with the remission of interest on underpaid provisional tax for the 2020-21 income tax year where the taxpayer could not forecast their tax liability because of COVID-19.
It addresses the difficulty in determining how much tax should be paid, particularly at the first and second instalment dates.
Section 183ABAB – introduced earlier this year – deals with the remission of interest if COVID-19 prevented a taxpayer from making on time a tax payment that was due on or after 14 February 2020.
It addresses their ability to make the tax payment.
That distinction is important to note.
We welcome IRD’s decision to cut taxpayers still reeling from the impact of the pandemic a break for the upcoming year.
Many businesses don’t want to make their 2020-21 provisional tax payments based on an uplift calculation from a pre-COVID time. Being able to pay provisional tax based on how a business is expected to perform this year – without the seven percent interest consequence that comes with it if the forecast turns out to be incorrect – will offer cashflow benefits at a time when many folks are looking to recover, rebuild and get back on their feet.
Kudos must also go to our friends at Chartered Accountants Australia and New Zealand. They were the ones who lobbied IRD for the concession. It would not have come to pass if it wasn’t for their work.
Who can apply for the remission?
IRD has made it clear this is not a free pass for everyone. They expect someone not impacted by COVID-19 to pay on time and in full.
Any underpaid provisional tax that arises as a result of a taxpayer miscalculating their forecast for the 2020-21 income year must be due to a ‘who-would-have-thought-that-would-happen?’ event. That’s how to interpret “significantly adversely impacted by COVID-19” in the context of s183ABAC.
For instance, the New Zealand border reopening in late January next year and those in the tourism sector experiencing a late upswing in profitability because of that would be classified as such an event. In that situation, IRD would agree to remitting the interest someone will incur on underpaid provisional tax at any instalment dates that were due and payable prior to this event happening.
However, someone who has the resources available to accurately forecast their liability is unlikely to get much sympathy if they get it wrong.
IRD says it will determine these ‘who-would-have-thought-that-would-happen? events on a case-by-case basis. They plan to publish examples on their website to provide more clarity.
Someone is also encouraged to keep a record of any information that can justify why they made the payment they did at the time. This is important. They may request to see supporting documents when reviewing applications for relief.
Be warned: IRD does not want taxpayers abusing a high-trust concession. Expect them to act accordingly if they discover anyone is taking the you-know-what.
Here are a few other things to note about the provisional tax interest remission.
- IRD’s ability to wipe interest is discretionary, not guaranteed. Whenever discretion is in the mix, inconsistencies can arise. For instance, TMNZ is seeing this in terms of how department staff is applying the interest remission rules in s183ABAB. Something similar may happen here.
- Moreover, there is less chance of IRD waiving interest if a taxpayer significantly underpays provisional tax at the date of their final instalment than if they pay short at their earlier payment dates. That will certainly be the case for larger and more sophisticated taxpayers who are better able to forecast how their business is tracking. And it makes sense, too. The first instalment is due early in the income year when it can be difficult to tell how things will unfold. The second instalment is due about two-thirds of the way through. There’s still a chance something drastic could happen after this that impacts a person’s ability to forecast their payment accurately. However, the date of the final instalment is typically a month after year-end. By this time, someone should have a reasonable expectation of their liability given they have completed their year.
- A taxpayer is going to have to file their return for the 2020-21 income year before asking for relief. Logically, that makes sense as IRD calculates interest and penalties retrospectively. However, that poses a big risk – especially as IRD may turn around and say ‘no dice’. That would leave someone exposed to interest on the underpaid tax and potentially late payment penalties too. Interest and late payment penalties will be from the date(s) of underpayment. The question will be: Does a taxpayer have enough faith to trust IRD?
- Whatever the case, we recommend you continue to use the standard uplift as the basis to calculate provisional tax payments for the 2020-21 income year. Why? The reason is simple. If IRD rejects an interest remission request, then interest on underpaid tax at instalment dates prior to the last one will be charged on the lesser of the standard uplift instalment amount or a third of the actual income tax liability. Interest at the date of the final provisional tax instalment will be charged on the remaining balance to settle the income tax liability for the year. Those who estimate provisional tax at any time during their year don’t enjoy this ‘lesser of’ protection. They will come badly unstuck if IRD says no to their request for relief and the income tax payable turns out to be MORE THAN the prior year’s result.
The role of tax pooling
For taxpayers wanting certainty of outcome when it comes to managing cashflow and provisional tax payments at this uncertain time – or those who do not meet the criteria to receive a remission of interest from IRD – tax pooling is the next best option.
That’s because acceptance is guaranteed, and no security or financial information is required.
We can offer payment flexibility and deferrals that are on a taxpayer’s terms. We can also eliminate late payment penalties and reduce the interest someone has to pay if IRD declines their request.
Yes, we charge a small interest cost to use our service.
However, this may be negligible. After all, we are a known quantity that can offer peace of mind and our payment arrangements are easier to set up.
Feel free to contact your TMNZ account manager if you have any questions about the provisional tax interest remission.
Disclaimer: This article is correct as at 11 August 2020. It is subject to change. TMNZ will update this article as and when it receives new information from IRD. We encourage readers to check this page regularly.