One of the challenges of paying provisional tax in times of economic uncertainty is making a payment that is both appropriate and does not negatively impact your cashflow.
Tax is one of the largest expenditure lines for a business, so you want to get it right.
You don’t want to overpay, because that’s money sitting at Inland Revenue (IRD) that you could be utilising in your business. Conversely, you don’t want to underpay because you run the risk of facing IRD interest of seven percent and late payment penalties from the date of your underpayment.
Tax pooling offers a safety net if you cannot make your 15 January payment on time or accurately forecast your payment due to the impact of COVID-19.
It’s a service that offers benefits not available to those who pay IRD directly, at no downside.
Pay provisional tax when it suits you
The Christmas-early New Year period is often a challenging time. After all, it is a four-week break from business as usual as things slow down.
For someone looking to manage cashflow, tax pooling lets you pay your 15 January provisional tax when it suits you.
Acceptance is guaranteed, and no security is required.
As an IRD-approved tax pooling provider, Tax Management NZ (TMNZ) can be used to pay your tax on the actual date it is due (e.g. 15 January 2021).
You then pay TMNZ as soon as cash is available and IRD recognises it as if the money was paid on time by you.
There are a couple of ways to pay.
You can finance your provisional tax payment. This sees you pay a fixed interest cost upfront and then the core tax amount at an agreed date in the future.
Alternatively, you can enter an instalment arrangement. Under this payment plan, interest is recalculated on the core tax amount owing at the end of each month.
The instalment arrangement offers flexibility in the sense you can pay as and when it suits your cashflow.
All tax pooling arrangements eliminate late payment penalties. The interest payable is significantly cheaper than the seven percent IRD charges if you fail to pay on time.
Pay what you think, top up later
Most taxpayers tend to base their provisional tax on a 105 percent uplift of the previous year’s liability.
However, the current economic climate may have forced some in highly impacted sectors to revise expectations around profitability for the 2020-21 income year to the point where making payments based on the calculation above is no longer appropriate.
Others simply may be facing difficulty forecasting their liability due to the uncertainty of COVID-19. As such, they may want to keep cash close at hand in case things change suddenly.
Now there is some good news.
You do not need to pay provisional tax on 15 January based on uplift, nor do you have to file an estimate to pay less than uplift.
Instead you can pay provisional tax based on your forecast expectations of profitability for the year at the time.
Don’t worry if, once you determine the liability for the 2020-21 income year, it transpires that you have underpaid. You can purchase any additional tax you owe on 15 January 2021 from TMNZ.
This can be done at a cost that is less than IR’s debit interest rate. It also eliminates any late payment penalties incurred.
That’s because the tax you are purchasing from TMNZ was paid to IRD on the date it was originally due.
You pay the core tax plus TMNZ’s interest cost when you make your payment to TMNZ. TMNZ then applies the date-stamped tax sitting in its IRD account against your liability.
IRD will treat it is if you paid on 15 January 2021 once it processes this transaction. The remits any late payment penalties showing on your account.
Please contact us if you have any questions about tax pooling.