Seller beware – IRD bright-line campaign update
Inland Revenue (IRD) will soon begin issuing letters to taxpayers within a month of them selling a residential property.
These will be sent as soon as the tax department identifies a transaction that potentially falls within the bright-line rules, to ensure people are aware of any possible tax obligations.
IRD says initially there will be a couple of catch-up rounds to account for residential property sales from November to June 2021.
From there, they will issue letters monthly as sales occur.
What to do if you receive a letter
In some circumstances, IRD may not be applying the law correctly because they don’t have all relevant facts.
Last year, the department acknowledged it sent letters by mistake to taxpayers whose property transactions did not fall under the bright-line test.
Still, it pays to speak to a tax professional if you are unsure or have any questions because the taxation of property is quite complex.
If you have sold a house and not returned the correct taxes, then you should complete a voluntary disclosure as soon as possible.
This can see the shortfall penalties IRD may seek to impose on the unpaid tax reduced. Shortfall penalties range from 20 percent up to 150 percent of the tax liability, depending on the seriousness of the mistake.
As an IRD-approved tax pooling provider, Tax Management NZ can eliminate late payment penalties and reduce the interest that the taxman may already be charging on the income tax amount owing as a result of a property sale, provided legislative requirements are met.
Please contact us to find out how and when we can assist with tax obligations that arise when a property sale meets the bright-line criteria.
The bright-line rules
The bright-line test means if you sell a residential property within a set period after purchasing it you will have to pay income tax on any profit made through the property increasing in value, unless there is an exemption.
It also applies to New Zealand tax residents who buy overseas residential properties.
Please refer to the table below to see which bright-line period applies.
| If the property was purchased… | Then the bright-line sale period that applies is… |
| On or after 27 March 2021 | 10 years |
| Between 29 March 2018 and 26 March 2021 | Five years |
| Between 1 October 2015 and 28 March 2018 | Two years |
The bright-line test does not apply to houses purchased before 1 October 2015.
Please note the Government has also indicated new builds acquired on or after 27 March 2021 will continue to be subject to the five-year test.
Exemptions
Generally, the bright-line property rule does not apply to a sale of property that has been your main home, inherited property, or if you're the executor or administrator of a deceased estate.
It's important to keep in mind that the main home exemption is not infinite, and can only be used twice in a two-year period.
However, different rules apply to someone's main home depending on when it was acquired.
Prior to 27 March 2021, a property was considered a main home if the owner had lived in it or used it as a main home for at least 50 percent of the time that they owned it.
Recently, though, the Government has introduced a ‘change-of-use’ rule.
This states that, after a sale, income tax will be payable for any period of more than 12 months if the property was not being used as someone's main home.
Visit IRD’s website for more information on the bright-line test and other property rules.
Can AIM taxpayers use tax pooling?
A taxpayer cannot use tax pooling to defer payment of, or settle, provisional tax instalments calculated under the accounting income method (AIM).
However, Tax Management NZ (TMNZ) can help AIM taxpayers with terminal tax or when they receive a notice of reassessment.
What does tax pooling legislation say about AIM?
Legislation in the Income Tax Act 2007 clearly states that a taxpayer can use tax pooling funds to satisfy “a provisional tax liability other than under the AIM method”.
Please refer to sections RP17-RP21 of the Act for further information.
Why IRD doesn’t allow tax pooling to assist with AIM payments?
Inland Revenue (IRD) says tax pooling manages taxpayers’ uncertainty around provisional tax payments and their exposure to interest.
Consistent with this objective, pooling is not currently available for tax types where someone has certainty of their liability at the time of payment (for example, GST).
Given the payments made under AIM are calculated on actual accounting profit, taxpayers will have certainty about what's due.
As such, it's IRD’s view that it's not appropriate to allow tax pooling for provisional tax payments calculated under AIM.
What does that mean for you?
IRD will reject the use of any tax pooling funds to satisfy an underpaid AIM instalment. As a result, late payment penalties and interest will continue to show on a taxpayer account.
They will, however, accept the use of tax pooling funds to settle a terminal tax liability. The same applies if an AIM taxpayer has additional tax to pay after receiving a notice of reassessment.
Please be mindful of these facts when entering arrangements with TMNZ.
It’s also an important consideration before electing to use AIM to calculate provisional tax.
That's because paying tax when income is earned is not necessarily the same as when cash is received.
If someone is unable to pay an AIM instalment on time or in full due to cashflow constraints, the safety net of tax pooling will not be available to reduce their exposure to interest and eliminate late payment penalties.
You're more than welcome to contact TMNZ if you have any questions.
Audit claim data highlights level of IRD’s behind-the-scenes activity
Inland Revenue (IRD) is still actively reviewing taxpayers despite COVID-19 and the various business disruptions the pandemic has caused in the past 12 months, according to figures released by Accountancy Insurance.
They saw a 31 percent increase in claims in all categories during the 2020-21 financial year compared to the 2019-20 financial year.
In terms of the proportion of claims, most related to GST verification (55 percent) and income tax returns (nearly 28 percent).
GST verification claim activity increased by 48 percent and income tax return-related claim activity by 67 percent in the 12 months to 31 March 2021.
The income tax return claim activity included cases relating to two campaigns IRD commenced in late 2020: They were the increased enforcement of the bright-line rules in December and the Automatic Exchange of Financial Account Information programme in November.
Accountancy Insurance says the following taxpayer categories had the highest number of claims during the 2020-21 financial year:
- Sole trader/partnership/non-trading company and trusts.
- Business groups <$500,000-$3 million turnover.
Industries under the spotlight
As most know, IRD has access to several large data sources which they use to help identify high-risk industries where there could potentially be low levels of tax compliance.
Low levels of compliance are usually seen in sectors where there is a high level of cash transactions.
Hospitality and construction are two such industries that IRD monitors regularly. The tax department recently launched a new campaign aimed at the latter.
And as well as property and the real estate industry, IRD is also taking an interest in cryptoassets.
Accountancy Insurance notes that client risk review claim activity decreased by 62 percent in the 12 months to 31 March 2021. In fact, this accounted for just 9.74 percent of all claims.
However, that was likely because the businesses which are typically subject to these reviews and audits were the ones most affected by multiple COVID-19 lockdowns in 2020.
They expect things will return to normal throughout 2021 as IRD ramps up its audit activity.
Reminder: We can help with IRD audits and voluntary disclosures
As an IRD-approved tax pooling provider, Tax Management NZ (TMNZ) can be used to get significant savings on Inland Revenue interest if they owe additional tax as a result of IRD issuing a notice of reassessment after an audit or voluntary disclosure.
TMNZ lets someone apply tax that was paid to IRD on the original due date(s) against their liability.
As such, IRD treats it as if they paid on time once it processes this tax pooling transaction. This eliminates any late payment penalties. Please note the legislation prohibits us from assisting with shortfall penalties.
A taxpayer can use TMNZ to reduce the interest cost on the difference between the original assessment amount and the reassessed amount that arises due to an audit or voluntary disclosure.
We can assist with income tax, and other tax types such as GST, PAYE and FBT when there is a reassessment.
Someone has up to 60 days from the date IRD issues the reassessment notice to pay the tax they owe via TMNZ.
TMNZ has the largest and oldest supply of audit tax in the market.
Please contact us if you have any questions about tax pooling. We’re happy to help.
Commissioner’s discretion for tax pooling
A provision within legislation allows taxpayers to use tax pooling for certain income tax or RWT voluntary disclosures where no return has been previously filed.
This is known as Commissioner’s discretion.
And it’s worth seeking if a taxpayer satisfies all relevant criteria (see below), as settling these underpaid tax types through an approved tax pooling provider such as Tax Management NZ (TMNZ) can result in notable interest savings. The interest we charge can be significantly lower than IR.
To use tax pooling for historical income tax and other tax types, there generally needs to be a notice of reassessment issued by Inland Revenue (IRD).
However, section RP17B (9) Income Tax Act 2007 stipulates that the Commissioner’s discretion found in RP17B (10) of the Act may be available in situations where a voluntary disclosure for income tax or RWT is made and a return for that tax type has not previously been filed.
The criteria for Commissioner’s discretion
That said, there are three conditions a taxpayer seeking Commissioner’s discretion to use tax pooling funds to settle income tax and RWT obligations must meet.
They are as follows:
- The increased amount arises as a result of an event or circumstance beyond the person’s control; and
- The person has a reasonable justification or excuse for not filing the return by the required date; and
- The person has an otherwise good compliance history for two income years before the income year in which the voluntary disclosure is made.
A taxpayer must satisfy all three requirements for the Commissioner to exercise her discretion.
This ensures that in exercising discretion she is satisfied that each occasion of non-compliance is not a deliberate act or a continuation of failures because of the taxpayer’s inadequate or poorly applied internal controls.
We recommend you refer to the examples 12 and 13 (pages 44 and 45) of the Tax Information Bulletin Vol 23, No 8, October 2011 to get a sense of the scenarios where IRD will allow or decline a request for Commissioner's discretion.
Applying for Commissioner’s discretion
The process is straightforward.
An application asking the Commissioner to exercise her discretion to use tax pooling funds can be made in writing.
Be sure to include the taxpayer’s name and IRD number in this correspondence.
Outline the details of the case in a few paragraphs. We recommend splitting this information under the following headings:
- Background information. Include information about the taxpayer and nature of their business. It should also contain contextual information that you deem relevant, such as historical business relationships, personal circumstances, and relationships with other/historical accountants.
- The increased amount arises as a result of an event or circumstance beyond the person's control. Include detailed (and chronological) events or factors that have occurred throughout the period in question that provide further contextual explanation as to how the liability has arisen and not been declared until now, and how this was beyond the taxpayer’s control.
- The person has a reasonable justification or excuse for not filing the return by the required date. Include any details that show the client has not been purposefully negligent.
- The person has an otherwise good compliance history for two income years before the income year in which the voluntary disclosure is made. Include details that support a good prior history. It’s important to show this occurrence is out of the ordinary and therefore worthy of consideration.
TMNZ has an email template available should you require this.
Requests asking the Commissioner to exercise her discretion can be sent to Rajni Raju at IRD by emailing Rajni.Raju@ird.govt.nz.
TMNZ is here to help
If you’d like further information on Commissioner’s discretion or wish to discuss a particular scenario, please call us on 0800 829 888 or email support@tmnz.co.nz.
Miscalculated your tax loss carry-back? Don’t worry – help is at hand
Tax pooling can reduce the interest cost a taxpayer faces significantly, if they have overestimated their loss under the temporary tax loss carry-back scheme.
Under the temporary Inland Revenue (IRD) scheme, those who expect to make a loss in the 2019-20 or 2020-21 income year can estimate that loss and use all (or a portion of it) to offset the profit made in the previous year.
A taxpayer can carry their loss back one year. For example, that would mean:
- Losses from 2019-20 income year can be carried back to the 2018-19 income year.
- Losses from the 2020-21 year can be carried back to the 2019-20 income year.
More information about the scheme and how it works is available here.
One of the major downsides of the loss carry-back scheme is a taxpayer falls outside of the IRD interest concession rules that apply for provisional taxpayers using the standard uplift method. This is because they must switch to the estimation method when determining the tax loss they wish to carry to back.
What happens if someone overstates their loss and receives a greater refund of tax for which they are eligible?
It means that normal IRD interest rules will apply for underpaid tax in the previous profit year.
For example, if someone with a 31 March balance date overestimated the loss they will make in the 2020-21 tax year and therefore has additional tax payable in the 2019-20 income year, IRD interest will apply from 28 August 2019, the date of their first instalment for the 2019-20 income year.
As of 8 May 2020, IRD charges interest of seven percent.
Moreover, the COVID-19 relief relating to remission of IRD interest is not available to taxpayers who use the temporary tax loss carry-back scheme.
How Tax Management NZ can help
If it turns out you have additional tax to pay in the 2018-19 or 2019-20 income year due to overstating your loss during the 2019-20 or 2020-21 income year, then help is available.
As an IRD-approved tax pooling provider, Tax Management NZ (TMNZ) can mitigate your exposure to the interest incurred on this tax.
That’s because we can apply backdated tax paid to IRD on the date it was originally due against your liability.
You make a payment directly to TMNZ comprising the core tax amount plus our interest. We then arrange a transfer of the tax you require from our IRD account to your IRD account.
The interest you pay TMNZ is significantly 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.
Legislative deadlines do apply.
If you have any questions about tax pooling, please feel free to contact us. We’re here to help.
Partnership with ATAINZ
March 29, 2021 — Tax Management NZ today announces a partnership with The Accountants and Tax Agents Institute of New Zealand (ATAINZ). The partnership will advance TMNZ's ambition to accelerate the adoption of tax pooling solutions amongst taxpayers who would benefit from genuine provisional tax flexibility. In addition, TMNZ is announcing plans to commence offers and opportunities via the ATAINZ membership.
ATAINZ members will be able to look forward to the collaboration between TMNZ and ATAINZ. Starting from Q2 2021 ATAINZ members will have available tax pooling training, collateral options, and an ATAINZ point of contact at TMNZ.
Richard Abel, Chairperson of ATAINZ said: “Having been a user and supporter of tax pooling through TMNZ for a number of years, we’re excited to formalise an agreement with TMNZ for all our members. Signing the partnership with TMNZ affirms our commitment to being recognised as the voice of small-medium businesses (SME) in New Zealand. Tax pooling presents a cashflow solution that more should be aware of.”
Neil Bhattacharya, Head of Client Services at TMNZ said: “ATAINZ is a progressive organisation that is growing quickly and TMNZ is looking forward to partnering with them for the next 3 years and beyond. We feel strongly that tax pooling is a key cashflow tool for SMEs and a perfect match for ATAINZ clients looking for cashflow options.”
About ATAINZ
The Accountants and Tax Agents Institute of New Zealand (ATAINZ) exists to promote the welfare and professional development of its members and to represent members' interests in New Zealand. It is unique in the New Zealand tax and accounting market because of its grassroots contact with members.
Property tax changes announced – what you need to know
Property investors will no longer be able to offset their interest expenses against rental income when calculating their tax.
This is one of three tax measures announced today by the Government as it attempts to cool the overheating New Zealand housing market.
The others include:
- Extending the bright-line test to 10 years.
- A ‘change-of-use’ rule within that test which will apply when a property is not used as the main home for more than 12 months at a time.
Below we explain what each measure means for property investors.
Removal of interest deductions
Currently when residential investment property owners calculate their taxable income they can deduct the interest on loans that relate to the income from those properties.
They can claim this as expense, therefore reducing the tax they need to pay.
However, the Government has decided to change the rules to remove residential investment property owners’ ability to do this.
The legislation will apply from 1 October 2021.
The impact
From 1 October 2021, you will be unable to claim interest deductions on residential investment property you acquire on or after 27 March 2021.
Interest on loans for properties acquired before 27 March 2021 can still be claimed as an expense.
However, the claimable amount will be reduced over the next four income years until it's completely phased out.
From the 2026 tax year onward, you will be unable to claim any interest expense as deductions against your income.
If your tax year runs from 1 April to 31 March, the proposed change will be phased in as per the table below.
| Tax year | Percent of interest you can claim |
| 2021 (1 April 2020-31 March 2021) | 100 percent |
| 2022 (1 April 2021-31 March 2022) | 1 April 2021 to 30 September 2021 – 100 percent 1 October 2021 to 31 March 2022 – 75 percent |
| 2023 (1 April 2022-31 March 2023) | 75 percent |
| 2024 (1 April 2023-31 March 2024) | 50 percent |
| 2025 (1 April 2024-31 March 2025) | 25 percent |
| 2026 (1 April 2025-31 March 2026)-onward | 0 percent |
If money is borrowed on or after 27 March 2021 to maintain or improve property acquired before 27 March 2021, it will be treated the same as a loan for a property acquired on or after 27 March 2021.
That means you will be unable to claim interest as an expense from 1 October 2021.
Property developers who pay tax on the sale of property will not be affected by this change and will still be able to claim interest as an expense.
Next steps
The Government is to consult on the detail of these proposals and will introduce legislation shortly thereafter.
Consultation will cover an exemption for new builds acquired as a residential investment property.
There will also be a decision around whether all people who are liable to pay tax on the sale of a property – for example, under the bright-line tests – should be able to deduct their interest expense at the time of sale.
Bright-line test extension
The bright-line test means if you sell a residential property within a set period after purchasing it you will have to pay income tax on any profit made through the property increasing in value, unless an exemption applies (keep reading).
The Government plans to extend the bright-line test from five years to 10 years.
This will apply for properties purchased on or after 27 March 2021.
However, the test for new build investment properties will remain at the current five years to support the goal of increasing housing supply.
A property acquired on or after 27 March 2021 will be treated as having been acquired before 27 March 2021 – provided the purchase was the result of an offer the purchaser made on or before 23 March 2021 that cannot be withdrawn before 27 March 2021.
There will be consultation with the tax and property communities over the coming months to help determine the definition of a new build.
However, the intention is to include properties that someone acquires within a year of the property receiving its code compliance certificate.
The Government will introduce into Parliament legislation defining 'new builds' and excluding them from the 10-year bright-line test following consultation.
It intends for the legislation to be retrospective.
As such, new builds acquired on or after 27 March 2021 will continue to be subject to the five-year bright-line test.
The family home and property that you inherit will continue to be exempt from the bright-line test.
Introduction of change-of-use’ rule
For residential properties acquired on or after 27 March 2021, including new builds, the Government intends to introduce a 'change-of-use' rule.
This will affect the way you calculate tax under the bright-line test if you do not use the property as your main home for more than 12 months at a time within the applicable bright-line period.
If a property switches to or from being your main home and the period when it is not your main home is 12 months or less, you do not need to count that as a change-of-use.
Put simply, you can treat those non-main home days as main home days.
Those subject to the change-of-use rule will have to pay income tax on a proportion of the profit made through the property increasing in value.
You will calculate that as follows:
- Subtract the purchase price from the sale price
- Minus the cost of capital improvements you have made
- Subtract the costs to buy and sell the property; and
- Multiply the result by the proportion of time you were not using the property as your main home.
Existing main home exclusion rules will still apply if a property was acquired on or after 29 March 2018 and before 27 March 2021.
Further reading
IRD has prepared two fact sheets about the removal of interest deductions and the extension of the bright-line test:
- Interest deductions on residential property income – proposed changes
- Bright-line test proposed changes
Both contain examples that illustrate how the department will apply the proposed changes.
There is also a section on the IRD website regarding tax on property.
Talk with your accountant
We recommend you speak to your accountant if you have any questions about how these changes impact you as a property investor.
If you don't have an accountant, here is a directory of tax advisers we work with across New Zealand. One of these firms will be able to steer you right.
How tax agents can kick the hourly billing habit
It doesn't matter how many times you hear this question; there aren't many other questions quite as capable of putting an expert practitioner on the spot like a butterfly pinned to a display cabinet than the dreaded: ‘What's it going to cost?’
For accountants, lawyers and others who sell their expertise, it sometimes seems the only measure of value is the clock, but time – unlike money – is finite and never an accurate estimate of an expert's value.
Hourly billing is something most clients – and experts – can understand. It is tangible and easy to grasp and sell because it doesn't put a price on anything (at least when you’re trying to win the client).
However, hourly billing is also widely disliked by both parties. It is not an accurate valuation of worth for the expert, and for the client, the final price remains a dreaded unknown. After all, how long is a piece of string?
The problem for many people who value their time by the hour is fear. They fear they may lose the client to somebody else who sets a tangible hourly fee, and they fear clients will become suspicious, or that there will be scope creep which leaves them out of pocket at the end of the day.
Unfortunately, the hourly bill also sets the expert up to be negotiated down and for limits to be set on a project's scope. It also opens them up to questions about how each unit of time was spent.
In essence, the biggest challenge to overcome with hourly billing is a change in mindset for both parties.
Base your value against objectives
Part of changing a client's mindset about project-based fees is to set expectations upfront.
Bestselling author Alan Weiss points out that clients know what they want, but they do not know what they need. As the expert in the relationship, your value-add comes from determining what it is they need.
Once you know the client's objective and – based on your knowledge of what they will need to get there – you are in a position to charge against a successful outcome across two or three scenarios. With most finance, tax and law-related issues, there will be varying levels of success. For example, a reduction in tax owed, or a write-off of tax owed or a repayment arrangement with the IRD.
The tax agent may spend the same amount of hours, give or take, in achieving one of those scenarios, but most people can agree that achieving a tax write-off for the client will be worth more to the client than a repayment arrangement with the IRD, and they'll be willing to pay accordingly.
Take an unrelated scenario, say in public relations. A multi-national operating in New Zealand may be under pressure from the media because they are accused of engaging in environmentally unfriendly practices. The local pressure is costing the company thousands, but globally the costs and damages are running into the billions.
The consultant, drawing on his or her expertise, may spend just two hours conceiving a strategy so successful, the multi-national rolls it out across the globe. Based on hourly rates, they would have earned a grand total of $600. Is that a true reflection of value?
Three things to consider
To shift your practice to a more value-added billing system, try these steps:
- Establish the client’s objectives. They may want the problem to 'just go away'. For example. letters of demand from the IRD. But what do they actually want? A repayment arrangement, a write-off of taxes, or a massive reduction in the debt?
- Using your expertise, determine what they need. What are the possible outcomes, from the worst-case scenario to the best-case scenario?
- Set your project-based fees against each scenario. For example, $900 for a repayment arrangement; $2000 for a partial debt write-off and a repayment plan or $4000 or a total write-off of the tax debt.
While every tax agent has an ethical duty to ensure the best possible outcome for clients, reality suggests that there will always be varying degrees of success. Charging against those ‘degrees’ of success may be a fairer outcome for all.
Finally, avoid seeing each client as a one-off problem to be resolved. Instead, view your first engagement as the start of a value-added relationship.
“As a professional engaged in providing service to your clients, the immediate urge may be to fix what ails the client. However, the long-term goals are best met by improving the client's condition.” – Alan Weiss
Terminal tax isn’t due until 7 April – so why's IRD already charging interest?
Just because a terminal tax amount for the 2019-20 income year is not due and payable until 7 April does not mean Inland Revenue (IRD) is not already charging interest.
Why is this happening, you may be asking?
There could be several reasons. The method used to calculate your provisional tax payments, your income tax liability for the year or whether you underpaid or failed to pay an instalment on time and in full can all be factors.
However, to understand why that might be happening, one needs to understand the different interest rules that apply for provisional taxpayers.
Below we explain how they work for those who used the standard uplift or estimation methods to calculate their payments during the 2019-20 income year.
We also cover the somewhat unfair rules that apply for new provisional taxpayers in their first year of trading because these often catch people out.
Standard uplift method
Please refer to the table below.
| If your income tax liability for the year is… | And you paid… | Then… |
| Less than $60,000 | All uplift instalments on time and in full or had no obligation to pay provisional tax for the year. | IRD interest should only apply from your terminal tax date if you fail to pay by then the final balance required to satisfy your liability for the 2019-20 income year. |
| $60,000 or more | The uplift instalments on time and in full at all instalment dates prior to the last one.
Any final balance remaining to settle what is owed for the year at the date of the final instalment. |
IRD interest should only apply from the date of your final instalment if you fail to pay by then the remaining balance to satisfy your liability for the 2019-20 income year. |
But what happens if you did not pay an uplift instalment on time or in full?
In this situation, the following rules will apply.
When provisional tax is underpaid or paid late at an instalment date prior to the final one for the 2019-20 income year, IRD will charge interest on the lesser of:
- The uplift payment due, minus any amount paid in relation to that instalment; or
- The actual income tax liability for the year divided by the number of instalment dates for the year, minus any amount paid in relation to that instalment.
At the date of the final instalment, IRD will also charge interest on the remaining balance owing to settle your liability for the year.
Estimation method
For those who used or switched to the estimation method at any time during their 2019-20 income year, IRD may be charging interest as far back as the date of the first provisional tax instalment if you did not pay enough tax to satisfy your actual liability.
Interest will be charged based on the following: The income tax liability for the year divided by the number of instalments payable for the year, minus any amount paid in relation to that instalment.
New provisional taxpayers
A different set of rules apply to those in their first year of trading whose income tax liability is $60,000 or more.
That’s because they will be deemed to be a new provisional taxpayer.
A taxpayer must meet certain criteria to be considered a new provisional taxpayer. This criteria differs for individuals and companies/trusts.
For the 2019-20 income year, an individual is a new provisional taxpayer if they satisfy ALL of the below:
- Their income tax liability for the year is $60,000 or more.
- Their income tax liability in each of the four previous tax years was $2500* or less; and
- They stopped receiving income from employment and started to receive income from a taxable activity during that tax year.
A Company/trust is a new provisional taxpayer in the 2019-20 income year if they satisfy ALL of the below:
- Their income tax liability for that tax year is $60,000 or more; and
- They did not receive taxable income from a taxable activity in any of the four previous years.
How many interest instalments
IRD will charge interest based on the number of instalments you could have paid if you are a new provisional taxpayer.
The number of instalments you could have paid is based on the date you started your taxable activity.
For those with a 31 March balance, please refer to the table below.
| If your first year of trading starts… | Then the number of provisional tax instalments payable is… |
| Before 29 July | Three (28 August, 15 January and 7 May) |
| On/after 29 July but before 16 December | Two (15 January and 7 May) |
| On 16 December or any time after that | One (7 May) |
These dates will differ if your balance date is not 31 March or you file GST returns on a six-monthly basis.
Interest will be charged based on the following: The income tax liability for the year divided by the number of instalments payable for the year, minus any amount paid in relation to that instalment.
*For the 2020-21 income year onward, the threshold was increased to $5000.
How Tax Management NZ can help
If there is IRD interest showing on your account, there's a way to reduce this cost significantly.
As an IRD-approved tax pooling provider, Tax Management NZ (TMNZ) can apply tax paid to IRD on the original due date against your liability if you have missed or underpaid your provisional tax for the 2019-20 income year.
This wipes any IRD interest and late payment penalties showing on your account.
How it works
You pay the core tax plus TMNZ’s interest to us rather than paying IRD directly.
Once we receive your payment, we transfer the date-stamped tax amount you require from our account at IRD to your IRD account.
As the tax carries a date stamp, IRD treats it as if you have paid on time once it processes this tax pooling transaction. This eliminates any late payment penalties incurred.
TMNZ’s interest cost can be significantly cheaper than the interest IRD charges if you underpay your tax. As of 8 May 2020, IRD debit interest is currently seven percent.
You have up to 75 days past your terminal tax date for that tax year to pay the additional provisional or terminal tax you owe via TMNZ.
That means if you have a 7 April 2021 terminal tax date, you have until mid-June to settle your income tax for the 2019-20 income year.
Please contact us if you have any questions about tax pooling.
IRD payment allocation rules explained
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 significantly reduces the interest cost on the underpaid tax.
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.