IRD has announced a suite of tax relief measures during COVID-19 to help struggling businesses.
However, a tax pooling provider such as Tax Management NZ (TMNZ) offers some solutions of its own for those wishing to manage cashflow, facing uncertainty about their profitability or needing access to funds during this difficult economic time:
- Provisional tax payment deferral.
- Reducing exposure to interest if someone miscalculates their income tax.
- Using tax pool deposits as a line of credit.
Below we explain how these three tax pooling solutions work. We also compare them to IRD’s equivalent offering at this time.
1. Provisional tax payment deferral
IRD’s remission of interest if someone is unable to pay their tax on time.
Businesses who cannot pay on the prescribed instalment date due to cashflow constraints.
Drawback of IRD’s offering
At first glance, this looks pretty good. Even more so given IRD has the power to remit interest all the way up to 25 March 2022.
However, dig deeper and you will see its ability to wipe interest if a taxpayer fails to make a tax payment due after 14 February 2020 on time because of COVID-19 is discretionary.
That’s important to note.
Whenever discretion is in the mix, inconsistencies can arise and we have seen a number of these already.
There are also a few hoops to go through in terms of:
- Requesting the relief as soon as possible.
- Proving eligibility.
- Providing accounting and financial information to support a claim.
- Maintaining the agreed payment plan set by IRD to ensure there is no default. Remember, this is not a tax holiday. There is an obligation for someone to pay what they owe as soon as practicable.
For those wanting certainty of outcome or less hassle, tax pooling is a better option.
Indeed, someone wanting to manage their provisional tax payments in a way that better aligns with their cashflow requirements can defer an upcoming payment to a date in the future with TMNZ, without having to worry about late payment penalties.
For a taxpayer with a 31 March year-end, they would have up to 22 months from the date of the first instalment (28 August 2020) of the 2020-21 income year to settle their provisional tax.
That means payment would not need to be made until mid-June 2022.
Acceptance is guaranteed with tax pooling. No security or additional information is required.
There are a couple of ways to pay with TMNZ.
Someone can pay a fixed interest fee upfront and then the core tax at an agreed future date or make a one-off payment of interest and core tax when they figure out their liability.
They also have the option of paying what they owe in instalments.
TMNZ’s interest is much cheaper than the seven percent IRD otherwise charges if someone does not make a payment on time.
This cost may be negligible given a tax pooling arrangement is easier to set up, offers more payment flexibility and gives someone peace of mind at an uncertain time.
2. Reducing exposure to interest if someone miscalculates their income tax
IRD’s remission of interest on underpaid provisional tax for the 2020-21 income year for those using the standard uplift or estimation methods who are impacted by COVID-19.
Businesses who are uncertain how their year will play out due to the global pandemic.
Drawbacks of IRD’s offering
IRD’s recently announced relief is only for smaller- and medium-sized businesses with a liability of less than $1 million who can demonstrate their ability to forecast what they owe for the year at one or more provisional tax dates was “significantly adversely affected” by COVID-19.
In other words, any underpayment needs to be due to a change in circumstance that is totally out of their control (i.e. the border reopening), not human error. Those who have tools to forecast what they owe – as well as those who make no effort to forecast – are unlikely to qualify for the remission.
Someone not impacted by COVID-19 is expected to pay on time and in full.
The other thing to note is IRD will decide who qualifies for relief on a case-by-case basis after a taxpayer files their return for the 2020-21 income year.
Again, this is a discretionary power.
That poses a significant risk if someone is touch and go as to whether they meet the criteria for assistance. After all, if IRD declines their application, they will be up for IRD interest from the date of their first instalment for the 2020-21 income year.
A taxpayer facing uncertainty over their profitability for the upcoming year who does not want to pay provisional tax based on an uplift calculation from a pre-COVID-19 time has another option if they are unlikely to qualify for this remission.
They can make their provisional tax payments based on how their year is unfolding – and then use TMNZ to wipe late payment penalties and reduce the interest cost they face if they end up underpaying their tax.
We offer savings of up to 30 percent on IRD interest.
TMNZ let’s a taxpayer apply provisional tax that was originally paid to the tax department on the date(s) it was originally due against their liability.
As such, IRD treats it as if they paid on time once it processes this their tax pooling transaction. This eliminates any late payment penalties.
A taxpayer has up to 75 days from their terminal tax date for the 2020-21 income year to pay any underpaid provisional tax with TMNZ.
3. Using tax pool deposits as a line of credit
IRD’s temporary tax loss carry-back scheme.
Taxpayers who hold deposited funds in TMNZ tax pool in urgent need of cash.
Drawbacks of IRD’s offering
Under the temporary tax loss carry-back scheme, a taxpayer who expect to make a loss in either the 2019-2020 or 2020-2021 income year will be able to estimate that loss and use all (or a portion of it) to offset any profit made in the previous year.
This allows those who need cash urgently to receive a refund of any income tax paid in the previous year.
However, some taxpayers are nervous about using the regime as they are uncertain how the 2020-21 income year will play out.
There are consequences if they overestimate the loss they are carrying back and this results in tax payable in the previous profit year.
In a nutshell, someone will incur IRD interest all the way back to the first instalment date of the profit year.
This is because they have to file an estimate with IRD in order to use the scheme. That subsequently takes them out of the interest concession rules that apply for standard uplift taxpayers.
Tax pooling allows someone short on cash to temporarily withdraw deposits they hold in the pool.
A taxpayer receives from TMNZ an amount equal to their deposited funds (minus an upfront interest cost), while having the option to restore those deposits at their original deposit date(s) when their cashflow situation improves.
Unlike the temporary tax loss carry-back scheme, there is no need to be in a loss position to access funds.
The ability to stay within the standard uplift interest concession rules also remains intact as there is no requirement to file an estimate with IRD.
Someone needs to give consideration to their imputation credit account balance before withdrawing any tax pool deposits.
It’s also important to note that funds taken out of the pool switch from own to purchased funds.
That means to reinstate the deposit(s) at their original dates, a taxpayer must have paid back and transferred the core tax from the tax pool to their account at IRD within 75 days of their terminal tax date for that tax year.
TMNZ operates with the blessing of IRD and under legislation set out in the Income Tax Act 2007 and Tax Administration Act 1994.
Not only are we New Zealand’s first and oldest tax pooling provider, it was our company founder, Ian Kuperus, who came up with the concept and worked with officials to set up a framework.
TMNZ has been creating a better tax environment for businesses since 2003.
For more information about tax pooling, please feel free to contact us.