IRD payment allocation rules explained

IRD payment allocation rules explained

IRD payment allocation rules explained 1200 630 Lee Stace

Provisional tax payments made on or before the date of the final instalment for the year are applied to the oldest overdue tax amount first while payments made after the date of the final instalment are applied to the interest owing on any overdue tax first, then the overdue tax amount.

The IRD payment allocation rules – which are found in s120F and s120L Tax Administration Act 1994 – also apply to payments made via a tax pooling provider such as Tax Management NZ (TMNZ).

It’s important to understand how they work and differ from one another.

Detailed explanation

Section 120L covers provisional tax payments made on or before the date of the final instalment for the year.

It requires IRD to apply a payment to unpaid tax in order from oldest to newest. Please note the unpaid tax amount(s) include late payment penalties.

Section 120F deals with payments that are made after the date of the final provisional tax instalment for the year.

It requires IRD to apply payments, in the following order, towards:

  • The interest accrued on the oldest unpaid tax amount until that interest is paid.
  • The oldest unpaid tax amount until that tax is paid.
  • The interest accrued on the next oldest unpaid tax amount until that interest is paid.
  • The next oldest unpaid tax amount until that tax is paid.
  • To each subsequent arising interest and unpaid tax amount using the pattern above, in time order that relevant unpaid tax arises, until they are paid.

Again, the unpaid tax amount in s120F includes late payment penalties.

The ramifications

These allocation rules mean a taxpayer may well find a tax payment they intended to be destined for a particular instalment date is allocated by IRD’s system to earlier unpaid amounts first.

For example, let’s say they may make a $10,000 payment on time and in full on 15 January 2021. However, if they failed to pay their 28 August 2020 (P1) provisional tax, then their $10,000 payment will be applied as per s120L to the overdue tax amount (including late payment penalties) at P1 first.

As such, this leaves them exposed to additional (and unexpected) late payment penalties and interest.

It does not matter if the $10,000 payment they made on 15 January 2021 is a date-stamped transfer from the account of a tax pooling provider. Please see sRP19 (1B) Income Tax Act 2007.

In other words, you need to clear the tax liability at all earlier instalment dates first.

How TMNZ can assist with missed provisional tax payments

It’s best to purchase from TMNZ the backdated tax to cover the shortfall at the earlier instalment date.

This achieves two things.

Firstly, it eliminates late payment penalties and reduces the interest cost on the underpaid tax by up to 30 percent.

That’s because the tax you are purchasing from TMNZ was paid to IRD on the date it was originally due. IRD will treat it as if you have paid on time once it processes your transaction with TMNZ.

Secondly, it ensures that any other payment that was otherwise made on time and in full will be allocated to the particular provisional tax date for which it was intended.

A taxpayer has up to 75 days past their terminal tax date for that tax year to purchase the tax they require.

For example, if you have a terminal tax date of 7 February 2021, you will have until mid-April to settle your 2020 income tax with TMNZ. Those with a 7 April 2021 terminal tax date have until mid-June.

Please contact us if you have any questions. We’re happy to help.