The 15 January provisional tax catch

The 15 January provisional tax catch

The 15 January provisional tax catch 1024 683 TMNZ Blog

Did you wait to file after 17 January?

Inland Revenue raised a provisional tax payment issue in the Tax Intermediaries update on 27 January 2022. Here we discuss the issue in more detail, as well as the help available to you if your clients are impacted. 

Typically, for a client using the standard uplift method, when their tax liability is higher in the last financial year compared to the year prior to that, the accountant will hold off filing the last year income tax return until after the second provisional instalment date (P2). This is so they can get the benefit of basing the P2 amount on the year with the lower tax liability.

For this to be effective, they need to have an extension of time for filing the prior year return and file it after the provisional tax payment date. If the payment date falls on a weekend, then it moves to the next working day.

For the first time since rules changed in 2018, 15 January fell on a weekend, so it moved to Monday 17 January 2022. Therefore, people needed to wait until at least 18 January to file the 2021 return, not 16 or 17 January. An easy catch to miss.

Unfortunately, not everyone has noticed this, and as a result some 2022 P2 liabilities have been updated to reflect the higher liability based on the 2021 tax return. This may have resulted in a tax shortfall where payment was based on 110% of the 2020 Residual Income Tax (RIT).

For example, an accountant filed the 2021 return for their client on 17 January 2022 as this is after the 15 January instalment date. In this scenario, the uplift amount that was originally calculated based on the 2020 year has been changed to reflect the liability based on 2021. As the client’s RIT was higher in 2021 compared to 2020, the provisional liability for P2 will be higher.

So, what help is available for those impacted? Taxpayers can purchase a tax shortfall from TMNZ which is recognised by Inland Revenue as an on-time payment. This will significantly mitigate their interest exposure. Please contact our support team if you would like to discuss this further. 

Legislative references: Section RC 5 (3) of the Income Tax Act 2007 and SPS 21/03.