The outbreak of COVID-19 is making it even trickier to work out how much provisional tax to pay, not to mention finding the funds to pay it.
That’s why, with 28 October approaching, we’re going to offer a couple of pointers to consider as you look to manage this uncertainty in a pandemic-impacted environment.
This includes an option to defer this payment for up to 19 months – without having to worry about any nasty consequence from Inland Revenue (IRD). Feel free to skip the boring stuff and scroll straight to that section now.
We also look at the pros and cons of the respective options available to calculate your payment.
For taxpayers with a 31 March balance date who file their GST returns every six months, 28 October will be the first of two provisional tax instalments payable for the 2020-21 income year.
It is also the first of three instalments payable for those with a 31 May year-end who file their GST returns monthly or every two months.
As you can see, it looms as an important payment date.
What should you pay?
Ah, that’s the $64,000 question really.
Even more so given that you probably don’t keep a crystal ball in the top left drawer of your desk into which you can gaze upon the future to ascertain just how much of an impact COVID-19 may have on your bottom line.
But while working out the liability to the exact cent is far from easy – even at the best of times – it does not change the fact you generally have two options when it comes to calculating your provisional tax payments.
- Pay based on an uplift of an income tax liability from a pre COVID-19 time. This is known as using the standard uplift method.
- Pay based on your current expectation of profitability for the 2020-21 income year.
Paying based on an uplift of a prior year
If you travel down this route, the provisional tax payable for the 2020-21 income year will be based on either:
- Your 2020 income tax liability plus five percent; or
- Your 2019 income tax liability plus 10 percent (if your accountant has not filed your 2020 tax return and does not legally have to do so until 31 March 2021).
The benefit of paying uplift means you will not incur IRD interest (UOMI) – currently seven percent – from 28 October 2020 if it turns out you have not paid enough provisional tax to satisfy the liability for the year.
Given this is the date which carries the longest exposure to UOMI, sticking with uplift may be a sound insurance policy if you feel a similar result to last year is on the cards or want to play it safe in this uncertain environment to ensure you are not caught short later if business picks up down the track.
And besides, if things turn to custard, you can always revise your payment downwards later to account for any overpayment on 28 October once the picture starts to become clearer.
However, the downside of paying on uplift means you may end up making a provisional tax payment that is not reflective of your current earnings (or more than your expected profitability for the year).
From a cashflow perspective, that can be problematic as generally you will not be able to get your overpaid tax back from IRD until after you have filed your 2020-21 income tax return.
Paying based on forecast profitability
Indeed, there’s no denying COVID-19 has delivered a Jerry Collins-esque tackle to economy. More than 85 percent of SMEs are expecting a lower profit in the next nine months, according to New Zealand’s Prosper Small Business Resilience Survey.
As such, you may be considering making a payment on 28 October that is more in line with how you are currently performing – especially if your business earnings have been significantly impacted by the restrictions imposed at alert levels two, three and four, a lack of international tourists, supply pipeline issues or something else related to the outbreak of the virus.
On plus side, you won’t be paying any more provisional tax than you need to if you choose to do this. That will certainly offer a cashflow benefit by allowing you to keep money in your business.
You can always revise payments upward or downward depending on how everything unfolds.
However, it means you run the risk of incurring UOMI from 28 October 2020 if you experience a sudden or late upswing in profitability during the backend of the 2020-21 income year and provisional tax paid on this dates turns out to be less than the amount required.
That said, there is a way to reduce the interest cost on underpaid tax. More on that shortly.
Do you need to file an estimate with IRD to pay less than uplift?
We get this question a lot.
You do not – repeat, do not – need to file an estimate with IRD if you plan on paying provisional tax based on your expected profitability for the 2020-21 income year. There is no legislative requirement to do so.
Just make your payment on 28 October as you see fit.
Tax pooling can help if you cannot pay, or it turns out you have not paid enough
No matter the basis you utilise to calculate your 28 October payment, an IRD-approved tax pooling provider such as Tax Management NZ (TMNZ) can offer some assistance.
They offer payment options for taxpayers who:
- Do not or cannot make their payment on the prescribed IRD payment date.
- Want to eliminate IRD interest and late payment penalties if they underpay their tax.
Pay 28 October provisional tax when it suits you
Where preserving cash is of primary importance, you can use TMNZ to defer an upcoming provisional tax payment for up to 19 months, without facing UOMI and late payment penalties.
TMNZ will make a payment to IRD on your behalf on 28 October. You then pay TMNZ later.
This can be once the liability for the 2020-21 income year is known or when your cashflow situation improves.
The amount owed can also be paid in instalments.
You would have until mid-June 2022 to pay what you owe with Flexitax® if you have a 7 April terminal tax date. Check with your accountant if you are unsure what your terminal tax date is.
There is some interest to pay to TMNZ – but this is significantly cheaper than IRD’s UOMI rate.
Reduce the cost of underpaid tax
Tax pooling is not just for those who are struggling to pay the taxman on time.
Where forecasting profitability for the 2020-21 income year is proving challenging or you would simply prefer to make your provisional tax payments based on how your business is performing by reviewing your position at each instalment date, you can rest easy knowing that TMNZ can help in the event you get your payments wrong and wind up with additional tax to pay.
That’s because you can use TMNZ to slash the interest cost you face by up to 30 percent and wipe late payment penalties when you underpay tax.
TMNZ lets you apply provisional tax that was originally paid to the tax department on the date(s) it was due against your liability.
As such, IRD treats it as if you paid on time once it processes this tax pooling transaction. This eliminates any late payment penalties.
You have up to 75 days from your terminal tax date for the 2020-21 income year to pay any underpaid provisional tax with TMNZ.
It’s a useful option to pull out of your back pocket once you determine your actual position and file your return.
The savings TMNZ offers on underpaid tax can be significant.
Speak with your accountant
As always, we recommend you speak with and direct any questions you have about your 28 October provisional tax payment to your accountant.
If you don’t have an accountant, check out the directory of firms that TMNZ works alongside.
You can filter this list by specialist topic or search for a tax agent in your region.