Standard uplift method: Things accountants should know

Standard uplift method: Things accountants should know

Standard uplift method: Things accountants should know 1200 630 Lee Stace

Need a refresher on standard uplift and how the rules around this provisional tax calculation method work?

Don’t worry – we’ve got your back.

Below are some of the important things an accountant should know. It has been put together based on the queries we are receiving in the lead up to the 28 August provisional tax date.

This article covers:

  • A basic overview of this method.
  • The standard uplift calculation.
  • How the date of filing may impact the instalment amount due and payable.
  • The lesser of 105 and 110 percent uplift rule.
  • Whether a taxpayer can pay less than uplift and what happens if they do.
  • IRD interest and late payment penalties rules for standard uplift taxpayers.

We also explain how tax pooling can be of assistance for provisional taxpayers requiring more flexibility around payment.

Apologies in advance as lots of words follow.

Basic overview

Standard uplift means someone pays their provisional tax on an uplift of the previous year’s income tax liability.

It’s the most popular calculation method, with IRD saying 92 percent of taxpayers are using it. It’s also the default choice if someone does not elect to use another option that is available to them.

Payments throughout the year are typically spread evenly across three instalments, although a taxpayer who files their GST returns every six months will have their provisional tax spread across just two instalments.

For those with a 31 March year-end, payment dates will be 28 August, 15 January and 7 May if they are liable to pay three instalments of provisional tax. The payment dates are 28 October and 7 May if they are liable to pay two instalments.

Under standard uplift, a taxpayer calculates their provisional tax using either:

  • The previous year’s income tax liability multiplied by 105 percent; or
  • The income tax liability from two years ago multiplied by 110 percent.

What calculation can I use and when can I use it?

The uplift calculation a taxpayer uses for the upcoming year will be determined by when they file – or the date by which they are legally required to file (if this is earlier) – the previous year’s income tax return.

For example, those with a 31 March year-end need to file their 2019-20 income year return by no later than:

  • 7 July 2020; or
  • 31 March 2021 if they have an extension of time filing arrangement in place with IRD.

Please note that if a return is filed late by a taxpayer, IRD’s system will default to using the legislative date by which they were required to furnish their return, not that date the return ends up being filed.

This can impact the standard uplift calculation a taxpayer can use.

How that works in practice (using the 2020-21 income year as an example)

If the previous year’s return is filed or must be filed on/before the date of the first instalment, then the 105 percent uplift calculation is the only calculation that can be used as the basis to calculate all provisional tax instalments for the upcoming year.

However, there is no obligation to pay provisional tax for the upcoming year if the 2019-20 income tax liability was $5000 or less. The uplift amount that is due and payable at each date will be $0.

If, on the other hand, the previous year’s return is filed or can be legally filed after the date of the first instalment, then the 110 percent uplift calculation can be used as the basis to calculate any provisional tax instalment(s) for the upcoming year that are due and payable prior to the date the previous year’s return is filed.

There is no obligation to pay provisional tax at any instalment date(s) where the 2018-19 income tax liability is $5000 or less and this figure is what the taxpayer is using as the basis to calculate that payment. The uplift amount due and payable at that date will be $0.

That said, even when using the 110 percent calculation, the standard uplift amount due and payable at date of the final instalment must always be based on the 105 percent uplift calculation.

This is a legislative requirement as a taxpayer’s return for the previous year should have been filed before this date.

The lesser of 105 and 110 percent rule

However, if a taxpayer knows the previous year’s income tax liability will be much less than their income tax liability from two years ago, they have the choice of being able to make their standard uplift payments for the upcoming year using the 105 percent uplift calculation.  

This applies even if they are yet to physically file that year’s return.

That’s because in IRD’s system the 105 percent uplift calculation overwrites the 110 percent uplift calculation once someone files their return for the previous year – and any instalment amounts due and payable under the 105 percent calculation are retrospectively applied to the earlier payment date(s) if they are lower than what’s due and payable using the 110 percent calculation.

This happens irrespective of the date the taxpayer files the previous year’s return.

Example

Spud is a taxpayer with a 31 March balance date. He is looking to calculate his provisional tax payments for the 2020-21 income year.

He has the following RIT information for his two prior years.

Income yearIncome tax liabilityDate return was filed
2018-19$900031 March 2020
2019-20$6000Yet to file – but will do so in March 2021

Spud’s uplift instalments for the 2020-21 income year will be as follows:

  • 28 August 2020: $2100
  • 15 January 2021: $2100
  • 7 May 2021: $2100

That’s because once he files the 2019-20 tax return, the 105 percent uplift calculation overwrites the 110 percent uplift calculation.

As the uplift instalment amounts due and payable under the 105 percent calculation are lower than those due and payable under the 110 percent calculation ($2100 vs. $3300), IRD applies these retrospectively to any provisional tax instalment dates (these being 28 August 2020 and 15 January 2021) that were due prior to the date the taxpayer furnishes their return for the previous year.

The 7 May 2021 uplift instalment is also $2100 as it must based on an uplift of the previous year’s return.

Important

Please note this DOES NOT happen if 105 percent uplift payments are more than 110 percent uplift payments.

In this situation, a taxpayer retains the ability to use the lower 110 percent uplift at any instalment date(s) that was due and payable prior to the date they file the previous year’s return.

IRD interest rules and standard uplift

Assuming someone pays all uplift instalments on time and in full and their income tax liability for the year is less than $60,000, then they will only incur IRD interest if they fail to pay any final balance needed to settle what they owe for the year by their terminal tax date.

This is because they fall within the safe harbour interest concession. This concession applies only to those who use standard uplift and make their required payments when they are due.

A $20 tolerance threshold also exists to ensure those who underpay an instalment by a small amount are not unfairly prevented from using the safe harbour. (Please note it’s only available to those who pay on time.)

However, the interest rules work differently for those with an income tax liability of $60,000 or more.

Assuming someone pays all uplift instalments prior to the final instalment date for the year on time and in full, they will only face IRD interest from the date of their final instalment if they fail to pay any remaining balance needed to settle what they owe for the year.

IRD currently charges interest of seven percent if a taxpayer misses or underpays their tax.

Is someone limited to paying uplift when using standard uplift?

No, someone still has the option to pay provisional tax based on how their year is unfolding.

They don’t – repeat, don’t – need to file an estimate with IRD if they want to pay less than uplift. In most cases, TMNZ advises against filing an estimate.

See below for why.

What happens if someone doesn’t pay uplift and provisional tax for the year is underpaid?

The taxpayer will face IRD interest and late payment penalties from the date of any underpayment.

If provisional tax is underpaid at any instalment date prior to the last one for the year, IRD charges interest on the lesser of:

  • The standard uplift instalment amount, minus any amount paid in relation to that instalment; or
  • The income tax liability for the year divided by the number of instalments payable for the year, minus any amount paid in relation to that instalment.

At the date of the final instalment, IRD charges interest on the remaining balance required to settle the liability for the year if tax.

A taxpayer who files a provisional tax estimate with IRD at any time during the year is subject to different interest rules.

Instead, they face interest from the date of their first instalment if they underpay based on: Their income tax liability divided by number of instalments payable for the year, minus any amount paid in relation to that instalment.

We discourage most taxpayers from filing an estimate because the interest ramifications can be brutal if someone fails to pay enough provisional tax for the year due to a sudden or late upswing in profitability and the liability turns out to be MORE THAN what was due under standard uplift.

Late payment penalties under standard uplift

As mentioned earlier, late payment penalties will apply if a taxpayer fails to pay their uplift instalment on time and in full.

For the 2017-18 income year onward, IRD charges these on the following basis:

  • One percent the day after payment was due.
  • An additional four percent if tax (including late payment penalties) has not been paid after seven days.

Late payment penalties at ALL provisional tax instalment dates are charged on the lesser of:

  • The standard uplift instalment amount, minus any amount paid in relation to that instalment; or
  • The income tax liability for the year divided by the number of instalments payable for the year, minus any amount paid in relation to that instalment.

However, interest will continue to accrue from the date of the final instalment on the remaining balance required to settle the liability for the year.

How TMNZ can assist

As an IRD-approved tax pooling provider, TMNZ smooths the rough edges of the provisional tax regime.

We offer greater flexibility around when someone makes their payments. We provide this at a cheaper interest cost and without having to worry about late payment penalties.

TMNZ can also reduce a taxpayer’s exposure to IRD interest by up to 30 percent and wipe late payment penalties if they have missed or underpaid their income tax payments for the year.

Tax pooling is a useful tool to help manage cashflow. Please feel free to contact us for more information about this service.

You can also download our free guide on using the standard uplift method to calculate provisional tax.

Lee Stace

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

All posts by: Lee Stace

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