Working capital solution amid timber shortage

Working capital solution amid timber shortage

Working capital solution amid timber shortage 1200 630 Lee Stace
Image: Timber supply

For builders wanting to ensure they have enough materials to complete the jobs they have scheduled over the coming months amid the current timber shortage, there’s a source of funding available to them that they may have overlooked if they require working capital.

It’s their provisional tax payments.

And a service called tax pooling – which is offered by an approved commercial provider such as Tax Management NZ (TMNZ) – provides a way for them to use the money set aside for Inland Revenue (IRD) for more pressing needs.

It lets them pay their tax when it suits them, without facing any consequences from the taxman.

We can’t see the wood for the trees

The supply of wood to meet New Zealand’s domestic demand is under pressure.

Estimates suggest there is a five to 10 percent shortfall in supply. Various factors have contributed to the shortage.

However, the abrupt announcement by Carter Holt Harvey – one of New Zealand’s largest processors, manufacturers and suppliers – to cut structural timber supplies to some merchants has caused further panic, as it has come at a time when the building industry is frantically busy.

Indeed, planning ahead and shoring up supply in the short term have become even more important.

There are reports that some builders with working capital available to them have been wisely stockpiling timber in warehouses since last November.

Provisional tax is a source of working capital

However, what happens if someone wants to follow their lead yet does not have, or cannot access, the funds to pay for the supplies they need?

Well, here’s the thing – they do have working capital available to them. They just might not realise it because, at first glance, it seems such an unlikely source.

On 7 May, IRD is expecting many builders with a 31 March balance date to pay their final instalment of provisional tax for the 2020-21 income year.

Most would never dare not to pay the taxman on time, for they will run the risk of incurring steep interest (currently seven percent) and late payment penalties. The latter are charged as follows:

  • One percent the day after the tax amount was due.
  • An additional four percent if the tax amount (including late payment penalties) remains unpaid after seven days.

However, given the uncertainty of the current timber shortage, is handing provisional tax over to IRD the most productive use of those funds? If there was some way to hold off making this payment, would it not make better business sense to use the money set aside for tax to plan ahead to ensure there are enough materials on hand to keep you going and your customers happy?

After all, having a limited supply of timber in reserve makes it difficult to complete jobs on time (or at all). You don’t want to be caught short – especially if you have plenty of work in the pipeline and know you will have the money to pay the taxman later.

Defer 7 May provisional tax – pay when it suits you, without the consequences

Tax pooling offers a solution.

For an upfront fee, you can free up cashflow by financing your 7 May provisional tax payment for up to 13 months with TMNZ.

You don’t have to worry about incurring IRD interest and late payment penalties under this arrangement.

TMNZ’s interest rates start from less than two percent. Approval is guaranteed and no security is required.

Ahead of 7 May, you would pay TMNZ an upfront finance fee and TMNZ would make a date-stamped tax deposit into IRD account on your behalf.

The upfront finance fee is based on the tax amount required and the date in the future you wish to pay. You have the option to defer this payment up until mid-June next year.

At the agreed upon date in the future, you would pay TMNZ the core tax amount.

TMNZ would then arrange for the date-stamped tax deposit it made into its IRD account on 7 May to be transferred to your IRD account.

IRD would treat it as if you paid on time once it processes this transaction. This wipes any IRD interest and late payment penalties showing on your account.

Feel free to contact TMNZ if you have any questions. We’re happy to help.

Lee Stace

Lee Stace is the PR and Content Manager at Tax Management NZ.

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