Tax represents cash and for all businesses, cash is king – especially in April and May.
After all, Inland Revenue (IRD) is expecting two tax payments over these months.
The first is due tomorrow (7 April). That’s called terminal tax. If you did not pay enough tax during the 2019-20 income year, you will be liable to pay the remaining balance to settle your liability for the year by this date.
In some cases, IRD may already be charging interest (currently seven percent) on this amount.
A month later, businesses with a 31 March balance date will pay their final instalment of provisional tax for the 2020-21 income year.
Both have the potential to cripple cashflow in April and May if not dealt with accordingly.
That’s why it’s important to have a plan and know your options.
What to do and things to know
Pay the terminal tax first. It is the oldest debt, and you will have IRD’s debt collection team hot on your tail if you don’t.
In terms of the provisional tax due on 7 May, you will need to figure out what to pay.
What do you expect your yearly profit was? Did you pay sufficient provisional tax over the year? Those are questions you will need to ask yourself given this payment falls due after your income year has ended.
A safe harbour from IRD interest applies to taxpayers who expect to have an income tax liability of less than $60,000 and pay ALL instalments of provisional tax during the 2020-21 income year on time and full using the standard uplift method. Standard uplift is the default method if you did not choose to use another calculation option.
This means no IRD interest is payable on underpayments (or received on overpayments) until after the taxpayer’s terminal tax date. For the 2020-21 income year, this will be 7 April next year.
Many smaller taxpayers will benefit from using the safe harbour provision.
However, if you expect your income tax liability for the 2020-21 income year is going to be $60,000 or more – and you have paid ALL provisional tax instalments prior to 7 May on time and in full using the standard uplift method – you will need to pay the final balance to settle what you owe for the year to avoid incurring IRD interest from 7 May on any shortfall.
How we can assist with terminal and provisional tax
Tax Management NZ (TMNZ) can help you manage your terminal and provisional tax payments.
If you notice IRD interest showing on your account in relation to the terminal tax due on 7 April, we offer a way to reduce this cost.
As an IRD-approved tax pooling provider, we can apply backdated tax paid to IRD on the date it was originally due against your 2019-20 income tax liability.
You make a payment directly to TMNZ comprising the core tax amount plus our interest. We then arrange for the tax you require to be transferred to your IRD account.
The interest you pay TMNZ is up to 30 percent cheaper than what IRD charges for underpaid tax.
Once IRD processes this transaction, it will treat it as if you paid on time.
This clears any IRD interest and late payment penalties showing on your account.
You have up to 75 days past your terminal tax date to settle your 2019-20 income tax obligations with TMNZ.
Provisional tax – defer payment until June 2022
TMNZ can also assist with 7 May provisional tax if cashflow is a problem.
In the event you cannot or do not wish to pay on this date, you can enter an arrangement with us to pay your tax at a time that suits your business, without having to worry about late payment penalties.
You would have up to 13 months to pay your 7 May provisional tax payment with TMNZ.
TMNZ makes a date-stamped deposit into its IRD account on your behalf on 7 May and you pay us later.
You have the option of paying the full amount at a future date of your choosing or paying what you owe in instalments.
TMNZ transfers the date-stamped tax deposit from its IRD account to your IRD account as and when we receive your payment(s).
The tax department treats it as if you paid on 7 May once it processes this transfer, eliminating late payment penalties.
Again, our interest cost is much cheaper than what IRD charges for missed or underpaid tax.
Please contact TMNZ if you have any questions about tax pooling. We’re happy to help.