Don’t forget tax pooling as IRD targets residential property
Tax pooling can reduce the interest cost significantly and eliminate late payment penalties if someone owes additional tax for failing to declare property transactions captured under the bright-line test.
An approved provider of the service such as Tax Management NZ (TMNZ) can help with income tax that arises from residential property sales during the current tax year or one just completed, as well as in situations where Inland Revenue (IRD) has issued a notice of reassessment.
We are reminding taxpayers and accountants of the significant savings we can offer on underpaid tax as IRD cracks down on those who have sold houses without paying tax on their profits.
It was a hot news topic just before Christmas.
In case you missed it…
Indeed, the department is cross-referencing tax returns with property transactions and contacting those who may be subject to the bright-line test. Changes in legislation over the last few years requiring IRD numbers to be supplied with all property transactions means it is considerably easier for them to do that.
It’s also another telling reminder of how IRD can match large volumes of data from a variety of different sources. Anyone who underestimates the reach of IRD does so at their own peril. Just ask those buying and selling cryptoassets.
Letters have gone to those whose property sales might be within the bright-line test.
Some letters advise that taxpayers will need to return this income in their next tax return. Others are showing the tax as being overdue (due to the sale occurring in the previous tax year).
IRD is also encouraging accountants to talk with clients who sold residential property to ensure they’re aware of their obligations.
They estimate that up to 25 percent of investors may not have paid the relevant tax.
And given the heat in the residential property market and the media attention that escalating prices are attracting across New Zealand, it’s likely this is just the beginning of the campaign.
Remember, there is no statute of limitations on how far back in time IRD can go if undisclosed profits from the sale of a property are taxable under the bright-line test.
Bright-line test – a brief overview
The bright-line test requires income tax to be paid on the gains made if a residential property is sold within two years if it was purchased between 1 October 2018 and 28 March 2018 inclusive, or within five years if it was bought on or after 29 March 2018.
This rule also applies to New Zealand tax residents who buy overseas residential properties.
Exclusions only apply for the sale of the main family home or when someone sells a property they inherit. The same applies if you’re the executor or administrator of a deceased estate.
Under the bright-line test, you can use the main home exclusion if the following two situations apply:
- You have used a property as your main home for more than 50 percent of the time you’ve owned it.
- You have used more than 50 percent of the property’s area (including your backyard, gardens and garage).
It’s important to remember that having the intention to use the property as your main home is not enough. You must have actually used it for this purpose.
You can only use the main home exclusion twice within a two-year period. It does not apply if you show a regular pattern of buying and selling residential property.
Please note the bright-line test does not replace existing property tax rules such as the ‘intention rule’. You might still need to pay tax on your property profits even if the bright-line rule does not apply.
You can find out more information on IRD’s website.
What to do if you have a received a letter
While a letter from IRD can be alarming, there may be no need to panic straightaway.
That’s because in some circumstances they may not be applying the law correctly due to not having all relevant facts. After all, they’re only as good as the information they have.
There have been cases where communication issued by the department relates to property sales that are exempt under the main home exemption or where a house was actually purchased before the bright-line test was introduced. Moreover, IRD is identifying property sales in the current tax year before the taxpayer has had a chance to discuss their position with their accountant or turn their mind to filing a tax return.
To their credit, they have at least publicly acknowledged they sent some letters by mistake.
Nonetheless, you should seek specialist advice if you are unsure just to be on the safe side.
Tax laws around property are numerous and complex, not to mention costly if not planned for in advance. After all, charges interest (currently seven percent) if you don’t pay your tax on time and late payment penalties.
Talking with a specialist will save you money whether there is or isn’t tax to pay on the profit made from a residential property sale.
If you have not returned the correct taxes, then you should complete a voluntary disclosure as soon as possible.
This can see the brutal 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.
How TMNZ can assist with bright-line transactions
If you owe additional tax due to the sale of a property under the bright-line test, TMNZ can apply tax paid to IRD on the original due date against your liability.
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. (Tax pooling cannot assist with shortfall penalties unfortunately.)
TMNZ’s interest cost you can give you significant savings on the interest IRD charges if you underpay your tax.
There are some legislative conditions that you must meet to use tax pooling.
For the current tax year (2021) or one just completed (2020), 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.
In the event you receive a notice of reassessment from IRD, we can only assist with the difference between the original assessment amount and the reassessment amount.
You have up to 60 days from the date IRD issues the reassessment notice to pay the tax you owe via TMNZ.
Please contact us if you have any questions about tax pooling.
Back to the office? Not as you know it
Fresh out of lockdown in 2020, a lot of New Zealand companies were talking 'working from home as the new normal', but it hasn't exactly worked out that way, and a remote workforce is looking increasingly unlikely - or is it?
In July 2020 there were reports that the Auckland CBD economy would collapse due to the COVID-19 lockdown. In August, there were reports that an alarming number of shops in Wellington were boarded up – COVID-19 was speeding up the demise of the CBD which was already under threat from online shopping.
While many CBDs haven’t exactly bounced back with the spirit and energy of a child high on sugar, there are already signs that workers are returning to their city offices in growing numbers.
Heart of the City chief executive Viv Beck told Radio New Zealand in October that figures show people are returning to work in the city.
“The early spend data and pedestrian count information is showing that we are tracking quite positively overall. The domestic spending is picking up with more people back in the city, back at work and the return of events they're a significant attractor.”
How that compares to overseas
The Auckland experience is in alignment with studies overseas that have found that companies are bringing their staff back to the office, but with a bit more flexibility.
The October 2020 Vistage CEO Confidence Index survey of 1247 CEOs reports that even in the COVID-19 hit United States, 42 percent of CEOs are bringing employees back to the office. Twenty-eight percent will wait until 2021 – but return they will.
Some reasons why almost exclusively working from home may be short-lived is evidence that it leads to weaker controls, cybersecurity risks and a decline in innovation and company culture.
A growing response to the desire of more and more employees to work from home – less time stuck in traffic is a significant consideration – is the hybrid workforce model.
Defined as a blend of virtual and in-person work, the hybrid workforce model embraces the best of both worlds, and it seems to be gaining traction.
A recent Gartner, Inc. survey found that 82 percent of company leaders in the US plan to allow employees to work remotely, but only some of the time.
“Nearly half [47 percent] said they intend to allow employees to work remotely fulltime going forward. For some organisations, flex time will be the new norm as 43 percent of survey respondents reported they would grant employees flex days, while 42 percent will provide flex hours.”
In the UK, research by the Adecco Group UK and Ireland – Resetting Normal: Defining the New Era of Work study – reports that the majority (77 percent) of UK employees say a mix of office-based and remote working is the best way forward post COVID-19.
President and Country Head of the Adecco Group UK&I, Alex Fleming, says business leaders have a unique opportunity to hit reset on existing working patterns.
“Consider what, for instance, the new model of flexible working should look like. Crucially, these considerations should take into account what employees’ expectations are on these issues. Those businesses who welcome the new challenges and opportunities will be able to create working practices that will benefit both them and their employees for the long term, which will undoubtedly enhance colleague loyalty.”
Is FOMO hurting your advisory business?
Remember, when you were a kid, and you would gather with other kids for sport or play, and a couple of nominated children in the group would get to choose their teams? Do you recall the feeling of dread you had that you would get picked last or even not at all?
That same insecurity may be hampering your business success.
The dread or anxiety of being left out of the loop is today known by the nomenclature FOMO – fear of missing out – and affects everybody, regardless of temperament.
Tax advisers, accountants, bookkeepers and many other small to medium businesses in New Zealand tend to be a generalist in positioning, if not necessarily in nature.
Essentially, most expert-based businesses will take anybody who walks through the door, regardless of business type, sector or industry. In so doing, they are potentially losing out on a compelling business advantage – the power of differentiation that comes from having a niche.
Many experts and firms may find they attract more of one industry than another – often thanks to word-of-mouth – and so develop more significant expertise in that area. Still, they don't dare say it aloud because it may put other clients and customers off making sales inquiries – yes, that's FOMO.
However, in trying to be somebody to everybody, you end up getting lost in the crowd.
The best way to stand out in a crowded market is to differentiate. People notice different or novel before pretty much anything else. Having a niche is a point of difference.
Positioning around a niche is also a solid strategy for establishing your credentials as a specialist expert rather than just an expert. Also, it will increase your visibility within a chosen market because of word of mouth – it is easier to be famous in a small market than in a big one.
The human fear of loss is powerful. Some time ago a power company found that it had a better response from the word 'lose' than 'save' – people were more motivated to act out of fear of losing what they already had than they were by the prospect of gain.
Writing on the science of FOMO for Psychology Today, Nick Hobson PhD, says one solution to FOMO may be a shift in attention control.
“Focus less on potential losses of missing out and focus more on immediate gains of what's being done now,” Hobson says.
So instead of worrying out about the business you may be missing out on, concentrate on opening up opportunities in your niche. For example, earning a speaking spot at the annual event organisers' conference.
If you have considered positioning yourself within a niche for a specific type of client, sector, product or service, but you're worried that you might miss out, know that it's FOMO.
Know also that you are likely to achieve far greater gains by being the bigger fish in a smaller pond.
Payment options for 15 January provisional tax
Tax is one of the largest expenditure lines for a business, so you want to get it right.
You don’t want to overpay, because that’s money sitting at Inland Revenue (IRD) that you could be utilising in your business. Conversely, you don’t want to underpay because you run the risk of facing IRD interest of seven percent and late payment penalties from the date of your underpayment.
Tax pooling offers a safety net if you cannot make your 15 January payment on time or accurately forecast your payment due to the impact of COVID-19.
It's a service that offers benefits not available to those who pay IRD directly, at no downside.
Pay provisional tax when it suits you
The Christmas-early New Year period is often a challenging time. After all, it is a four-week break from business as usual as things slow down.
For someone looking to manage cashflow, tax pooling lets you pay your 15 January provisional tax when it suits you.
Acceptance is guaranteed, and no security is required.
As an IRD-approved tax pooling provider, Tax Management NZ (TMNZ) can be used to pay your tax on the actual date it is due (e.g. 15 January 2021).
You then pay TMNZ as soon as cash is available and IRD recognises it as if the money was paid on time by you.
There are a couple of ways to pay.
You can finance your provisional tax payment. This sees you pay a fixed interest cost upfront and then the core tax amount at an agreed date in the future.
Alternatively, you can enter an instalment arrangement. Under this payment plan, interest is recalculated on the core tax amount owing at the end of each month.
The instalment arrangement offers flexibility in the sense you can pay as and when it suits your cashflow.
All tax pooling arrangements eliminate late payment penalties. The interest payable is significantly cheaper than the seven percent IRD charges if you fail to pay on time.
Pay what you think, top up later
Most taxpayers tend to base their provisional tax on a 105 percent uplift of the previous year’s liability.
However, the current economic climate may have forced some in highly impacted sectors to revise expectations around profitability for the 2020-21 income year to the point where making payments based on the calculation above is no longer appropriate.
Others simply may be facing difficulty forecasting their liability due to the uncertainty of COVID-19. As such, they may want to keep cash close at hand in case things change suddenly.
Now there is some good news.
You do not need to pay provisional tax on 15 January based on uplift, nor do you have to file an estimate to pay less than uplift.
Instead you can pay provisional tax based on your forecast expectations of profitability for the year at the time.
Don't worry if, once you determine the liability for the 2020-21 income year, it transpires that you have underpaid. You can purchase any additional tax you owe on 15 January 2021 from TMNZ.
This can be done at a cost that is less than IR’s debit interest rate. It also eliminates any late payment penalties incurred.
That's because the tax you are purchasing from TMNZ was paid to IRD on the date it was originally due.
You pay the core tax plus TMNZ's interest cost when you make your payment to TMNZ. TMNZ then applies the date-stamped tax sitting in its IRD account against your liability.
IRD will treat it is if you paid on 15 January 2021 once it processes this transaction. The remits any late payment penalties showing on your account.
Please contact us if you have any questions about tax pooling.
How to grow your tax advisory through thought leadership
There's a so-called old piece of wisdom that says: “Absence makes the heart grow fonder.”
In reality, it is an old wives’ tale because it isn't true – not for relationships and not for tax advisory businesses. If you want more business, if you want more referrals and more growth, you need to up your 'visibility' in a way that is relevant to your audience.
Thought leadership is one way to achieve this goal.
The founder of the networking organisation Business Network International (BNI), Dr Ivan Misner, has what he believes is the most critical concept in networking.
“The VCP Process® – visibility, credibility, profitability – is a continuum,” he says. “Once you achieve credibility (and not before), you then need to start asking for referrals in order to achieve profitability. Profitability does not result automatically from visibility and credibility.”
What Misner is describing is true of marketing as well. While marketing – regardless of your methodology – will help you achieve visibility with your clients and potential clients, which in turn leads to credibility, you still need to do the hard work. In networking, it's asking for referrals. In your online marketing, it's about proving you are an expert, you are trustworthy, and you are good at what you do.
In this COVID-19 environment, opportunities to meet people face-to-face and interact personally to clinch new business and maintain existing business, are reduced. There is more emphasis on digital ways of working, shopping and socialising. While many accounting firms were dealing with the disruptions brought to reporting and compliance (and the rise of greater emphasis on advisory), COVID-19 is accelerating the change.
In this new climate, tax advisory businesses are advised to grow their online presence and visibility – to expand their digital footprint – in a way that establishes their credentials as expert and trustworthy.
Thought leadership can help you do that.
1. Be valuable
We are living in an age of content shock. There is quite literally a deluge of content (list stories, how-to stories, updates and reports). For example, content about the increase in the provisional tax threshold is relatively common. It is important content, it is of value, but it is not valuable because it is common. By all means, it is the kind of content that any practice should be creating and sharing, but it won't earn you thought leadership.
Thought leadership comes from creating content – blogs, podcasts, opinion editorials, videos et cetera – that are unique, and you achieve that by applying your unique expertise and interpretation to the events (like tax developments) going on around you. Always look to understand and communicate what it means for your audience at a granular level
2. Stand for something
Your clients and potential clients want you to have an opinion. It’s why they pay you. Thought leaders have an opinion, and they are not afraid to express it. If you try to be everything to everybody, you end up being nothing to nobody.
3. Aim for relevance
A content piece about how to improve cashflow is of value and also a common theme. Most companies, consultancies, banks and accounting firms have content about this. One way to differentiate your content and improve engagement is to add relevance by referring to the events and circumstances of the day.
For example, 'Maintaining cashflow this COVID-19 Christmas’ is current and timely. It is relevant because it refers to the issues of the day. Commentary about everyday problems and developments on the tax front should always be made in the context of the times in which we live.
In summary
It's not easy to 'stick your neck' out and establish your expertise, authority and trustworthiness through thought leadership, but nothing worthwhile is ever easy.
Whether you get more business from referrals or other marketing and sales methods, thought leadership will benefit your practice because it says that you know what you’re about.
How to overcome the pain of tax procrastination
With Inland Revenue (IRD) currently charging a penalty of seven percent interest, you would think that every single business owner in New Zealand would be highly motivated to get their tax issues sorted.
Why then, is tax procrastination a problem?
Tax is an obligation. We have no choice but to get on top of it. Whether that's paying on time if we can or, if we can't, making alternative arrangements. Solutions may include tax pooling through Tax Management NZ or reaching an agreement with IRD. However, there is a segment of Kiwi taxpayers who continue to bury their heads in the sand despite the potential pain it may cause.
However, tax procrastination, it turns out, is a 'thing' and it's not laziness either.
Dr Piers Steel, author of the book The Procrastination Equation: How to Stop Putting Things Off and Start Getting Stuff Done calls procrastination 'self-harm'. It's hard to argue with him when you consider the breath-taking tax penalty regime we face in New Zealand.
Dr Fuschia Sirois, a professor of psychology at the University of Sheffield, recently told the New York Times: “Procrastination isn’t a unique character flaw or a mysterious curse on your ability to manage time, but a way of coping with challenging emotions and negative moods induced by certain tasks — boredom, anxiety, insecurity, frustration, resentment, self-doubt and beyond”.
In short, we use procrastination to manage an immediate negative mood rather than with getting on with the task.
Beating tax procrastination
Carleton University’s Tim Pychyl suggests that the next time you feel inclined to put off something – like getting your tax sorted – you should simplify your focus down to taking the first step. The very next action helps shift your primary emotion.
“Once we get started, we’re typically able to keep going. Getting started is everything,” he says.
First tasks
Having a handful of obvious first steps you can take will help start you on that critical first step.
1. First step, get expert advice
If you are concerned about cashflow, particularly in this year marred by COVID-19, find a tax adviser (your accountant or tax consultant). Should you already have one, pick up the phone and speak to him or her about your options – even if it's to book an appointment.
Take that first step.
2. List your next steps
In partnership with your tax adviser, get an understanding of what all your options are. These may include tax pooling or coming to an arrangement with IRD for an extension, or a repayment schedule. Do you qualify for Working for Families or the temporary tax loss carry-back regime?
Knowing your options helps you put in place tangible next steps.
3. Reduce the workload
Sometimes the thought of having to gather all the bits and pieces of information we need can seem like a chore well worth postponing. To combat this, put in place a system that keeps your source of financial information at your fingertips.
One Auckland accounting firm reports that they have to chase at least 30 percent off their clients for 'bits of information' and it can take months. Most businesses are GST registered, which means that at least 90 percent of your needed business data is already available by the time you file your GST return. Almost every accounting software package on the market will likely have an app that lets you track receipts and other financial information in real-time.
According to research, procrastination (in all its guises) can be associated with high stress and related acute health problems. That's because the things we procrastinate never go away.
Avoid the costs of tax procrastination. Know what steps you're going to take and start taking them today.
IRD eyeing cryptoassets: Tax implications for investors
Come clean or expect Inland Revenue (IRD) to come calling.
For investors who are unaware of their tax obligations, this is the situation they face in the wake of the New Zealand tax department exercising its powers under the Tax Administration Act 1994 to request customer information from companies dealing with cryptoassets.
This appears to be part of a OECD initiative. The intergovernmental economic organisation recently released a comprehensive overview of the current tax treatment and tax policy gaps across the main taxes applicable to cryptoassets. This report looks at more than 50 jurisdictions, including all G20 and OECD nations.
IRD says it wants to help people get things right from the start.
It will not be surprising if investors receive a letter reminding them of their obligations and encouraging them to fess up if they have failed to disclose any income made from cryptoassets.
And investors would be wise to take heed of this correspondence.
After all, the information requested from cryptoasset companies includes customer blockchain wallet addresses and transactions until 31 March 2020.
It’s this type of data that may enable IRD to find other cryptoasset exchanges someone uses – even if those exchanges are based overseas – and compare the profile of cryptoasset investors against the position taken in their tax returns to see if there are any anomalies.
Don’t underestimate the department either. Its investigation staff are very effective at using this type of information to connect the dots. Just look at their work in the ‘Hidden Economy’.
What will be fascinating to see is just how much tax IRD is able to recover.
It has the potential to be quite a significant sum as the tax implications of cryptoassets do not appear to be widely understood by investors.
Tax treatment of cryptoassets
IRD treats cryptoassets as property for the purposes of tax, so normal income tax rules apply.
Its default view is that most people acquire cryptoassets with the intention of selling them. That’s because cryptoassets don’t pay interest and it’s only upon disposal that someone will realise a return on their investment.
This is very similar to its position on gold.
As such, in most cases, the profit an investor makes from disposing or exchanging cryptoassets is taxable.
To determine if tax is payable, IRD will look at the main purpose for acquiring cryptoassets at the time of acquisition.
Unless a person can provide clear and compelling evidence that shows they did not acquire cryptoassets with the intention of selling them, they must pay tax.
It does not matter how long someone plans to hold on to cryptoassets for before selling or exchanging them. A person’s main purpose can still be to sell or exchange them, even if it takes a several years for them to do so.
Cryptoasset income must be included as ‘other income’, business income or self-employed income in tax returns.
People must also keep accurate and complete cryptoasset records. They must hold these for at least seven years.
You can find more information on IRD’s website. It recently issued updated guidance on the tax treatment of cryptoassets.
This is a useful starting point and explains how it sees the rules applying for individuals and businesses. They even provide a few examples, too.
We strongly recommend you cast your eyes across this.
What to do now?
Investors would be wise to weigh up their next move now that IRD is looking further into cryptoassets.
The first thing to do is to speak to an accountant if you are unsure of your tax obligations. After all, this is a complex area and specialist advice should be sought.
In the event someone discovers they do have tax to pay on the profit they made from selling, trading, exchanging, mining or staking cryptoassets, they should consider making a voluntary disclosure.
The consequence of not disclosing taxable income can be brutal, with IRD charging shortfall penalties of up to 150 percent of the tax liability and usurious interest. The latter is currently seven percent, although has been much higher.
However, the truth shall set you free.
Making a voluntary disclosure can see shortfall penalties eliminated. Even if IRD has notified someone of an impending audit, there is still a possibility of a 40 percent reduction in shortfall penalties if someone comes clean before the investigation commences.
Reduce the interest cost with tax pooling
An IRD-approved tax pooling provider such as Tax Management NZ (TMNZ) can be used to reduce the interest cost significantly, if someone owes additional income tax due to failing to disclose the profit they made from their cryptoassets.
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 tax pooling from assisting with shortfall penalties.
For the current tax year (2021) or one just completed (2020), someone has up to 75 days past their terminal tax date for that tax year to pay the additional income tax they owe via TMNZ.
In the event a person receives a notice of reassessment from IRD due to an audit or voluntary disclosure, they can use TMNZ to reduce the interest cost on the difference between the original assessment amount and the reassessment amount.
We can assist with provisional and terminal tax, and other tax types such as GST, PAYE and FBT when there’s a reassessment.
Someone has up to 60 days from the date IRD issues the reassessment notice to pay the tax they owe via TMNZ.
Please contact us if you have any questions about tax pooling. We’re happy to help.
Important considerations: 28 October provisional tax
The outbreak of COVID-19 is making it even trickier to work out how much provisional tax to pay, not to mention finding the funds to pay it.
That’s why, with 28 October approaching, we’re going to offer a couple of pointers to consider as you look to manage this uncertainty in a pandemic-impacted environment.
This includes an option to defer this payment for up to 19 months – without having to worry about any nasty consequence from Inland Revenue (IRD). Feel free to skip the boring stuff and scroll straight to that section now.
We also look at the pros and cons of the respective options available to calculate your payment.
For taxpayers with a 31 March balance date who file their GST returns every six months, 28 October will be the first of two provisional tax instalments payable for the 2020-21 income year.
It is also the first of three instalments payable for those with a 31 May year-end who file their GST returns monthly or every two months.
As you can see, it looms as an important payment date.
What should you pay?
Ah, that’s the $64,000 question really.
Even more so given that you probably don’t keep a crystal ball in the top left drawer of your desk into which you can gaze upon the future to ascertain just how much of an impact COVID-19 may have on your bottom line.
But while working out the liability to the exact cent is far from easy – even at the best of times – it does not change the fact you generally have two options when it comes to calculating your provisional tax payments.
They are:
- Pay based on an uplift of an income tax liability from a pre COVID-19 time. This is known as using the standard uplift method.
- Pay based on your current expectation of profitability for the 2020-21 income year.
Paying based on an uplift of a prior year
If you travel down this route, the provisional tax payable for the 2020-21 income year will be based on either:
- Your 2020 income tax liability plus five percent; or
- Your 2019 income tax liability plus 10 percent (if your accountant has not filed your 2020 tax return and does not legally have to do so until 31 March 2021).
The benefit of paying uplift means you will not incur IRD interest (UOMI) – currently seven percent – from 28 October 2020 if it turns out you have not paid enough provisional tax to satisfy the liability for the year.
Given this is the date which carries the longest exposure to UOMI, sticking with uplift may be a sound insurance policy if you feel a similar result to last year is on the cards or want to play it safe in this uncertain environment to ensure you are not caught short later if business picks up down the track.
And besides, if things turn to custard, you can always revise your payment downwards later to account for any overpayment on 28 October once the picture starts to become clearer.
However, the downside of paying on uplift means you may end up making a provisional tax payment that is not reflective of your current earnings (or more than your expected profitability for the year).
From a cashflow perspective, that can be problematic as generally you will not be able to get your overpaid tax back from IRD until after you have filed your 2020-21 income tax return.
Paying based on forecast profitability
Indeed, there’s no denying COVID-19 has delivered a Jerry Collins-esque tackle to economy. More than 85 percent of SMEs are expecting a lower profit in the next nine months, according to New Zealand’s Prosper Small Business Resilience Survey.
As such, you may be considering making a payment on 28 October that is more in line with how you are currently performing – especially if your business earnings have been significantly impacted by the restrictions imposed at alert levels two, three and four, a lack of international tourists, supply pipeline issues or something else related to the outbreak of the virus.
On plus side, you won’t be paying any more provisional tax than you need to if you choose to do this. That will certainly offer a cashflow benefit by allowing you to keep money in your business.
You can always revise payments upward or downward depending on how everything unfolds.
However, it means you run the risk of incurring UOMI from 28 October 2020 if you experience a sudden or late upswing in profitability during the backend of the 2020-21 income year and provisional tax paid on this dates turns out to be less than the amount required.
That said, there is a way to reduce the interest cost on underpaid tax. More on that shortly.
Do you need to file an estimate with IRD to pay less than uplift?
We get this question a lot.
You do not – repeat, do not – need to file an estimate with IRD if you plan on paying provisional tax based on your expected profitability for the 2020-21 income year. There is no legislative requirement to do so.
Just make your payment on 28 October as you see fit.
Tax pooling can help if you cannot pay, or it turns out you have not paid enough
No matter the basis you utilise to calculate your 28 October payment, an IRD-approved tax pooling provider such as Tax Management NZ (TMNZ) can offer some assistance.
They offer payment options for taxpayers who:
- Do not or cannot make their payment on the prescribed IRD payment date.
- Want to eliminate IRD interest and late payment penalties if they underpay their tax.
Pay 28 October provisional tax when it suits you
Where preserving cash is of primary importance, you can use TMNZ to defer an upcoming provisional tax payment for up to 19 months, without facing UOMI and late payment penalties.
TMNZ will make a payment to IRD on your behalf on 28 October. You then pay TMNZ later.
This can be once the liability for the 2020-21 income year is known or when your cashflow situation improves.
The amount owed can also be paid in instalments.
You would have until mid-June 2022 to pay what you owe with Flexitax® if you have a 7 April terminal tax date. Check with your accountant if you are unsure what your terminal tax date is.
There is some interest to pay to TMNZ – but this is significantly cheaper than IRD’s UOMI rate.
Reduce the cost of underpaid tax
Tax pooling is not just for those who are struggling to pay the taxman on time.
Where forecasting profitability for the 2020-21 income year is proving challenging or you would simply prefer to make your provisional tax payments based on how your business is performing by reviewing your position at each instalment date, you can rest easy knowing that TMNZ can help in the event you get your payments wrong and wind up with additional tax to pay.
That’s because you can use TMNZ to make significant savings on the Inland Revenue interest cost you face and wipe late payment penalties when you underpay tax.
How?
TMNZ lets you apply provisional tax that was originally paid to the tax department on the date(s) it was due against your liability.
As such, IRD treats it as if you paid on time once it processes this tax pooling transaction. This eliminates any late payment penalties.
You have up to 75 days from your terminal tax date for the 2020-21 income year to pay any underpaid provisional tax with TMNZ.
It’s a useful option to pull out of your back pocket once you determine your actual position and file your return.
The savings TMNZ offers on underpaid tax can be significant.
Speak with your accountant
As always, we recommend you speak with and direct any questions you have about your 28 October provisional tax payment to your accountant.
If you don’t have an accountant, check out the directory of firms that TMNZ works alongside.
You can filter this list by specialist topic or search for a tax agent in your region.
Three tax pooling solutions for businesses impacted by COVID-19
IRD has announced a suite of tax relief measures during COVID-19 to help struggling businesses.
However, a tax pooling provider such as Tax Management NZ (TMNZ) offers some solutions of its own for those wishing to manage cashflow, facing uncertainty about their profitability or needing access to funds during this difficult economic time:
- Provisional tax payment deferral.
- Reducing exposure to interest if someone miscalculates their income tax.
- Using tax pool deposits as a line of credit.
Below we explain how these three tax pooling solutions work. We also compare them to IRD’s equivalent offering at this time.
1. Provisional tax payment deferral
Alternative to
IRD’s remission of interest if someone is unable to pay their tax on time.
Suitable for
Businesses who cannot pay on the prescribed instalment date due to cashflow constraints.
Drawback of IRD’s offering
At first glance, this looks pretty good. Even more so given IRD has the power to remit interest all the way up to 25 March 2022.
However, dig deeper and you will see its ability to wipe interest if a taxpayer fails to make a tax payment due after 14 February 2020 on time because of COVID-19 is discretionary.
That’s important to note.
Whenever discretion is in the mix, inconsistencies can arise and we have seen a number of these already.
There are also a few hoops to go through in terms of:
- Requesting the relief as soon as possible.
- Proving eligibility.
- Providing accounting and financial information to support a claim.
- Maintaining the agreed payment plan set by IRD to ensure there is no default. Remember, this is not a tax holiday. There is an obligation for someone to pay what they owe as soon as practicable.
TMNZ’s solution
For those wanting certainty of outcome or less hassle, tax pooling is a better option.
Indeed, someone wanting to manage their provisional tax payments in a way that better aligns with their cashflow requirements can defer an upcoming payment to a date in the future with TMNZ, without having to worry about late payment penalties.
For a taxpayer with a 31 March year-end, they would have up to 22 months from the date of the first instalment (28 August 2020) of the 2020-21 income year to settle their provisional tax.
That means payment would not need to be made until mid-June 2022.
Acceptance is guaranteed with tax pooling. No security or additional information is required.
There are a couple of ways to pay with TMNZ.
Someone can pay a fixed interest fee upfront and then the core tax at an agreed future date or make a one-off payment of interest and core tax when they figure out their liability.
They also have the option of paying what they owe in instalments.
TMNZ’s interest is much cheaper than the seven percent IRD otherwise charges if someone does not make a payment on time.
This cost may be negligible given a tax pooling arrangement is easier to set up, offers more payment flexibility and gives someone peace of mind at an uncertain time.
2. Reducing exposure to interest if someone miscalculates their income tax
Alternative to
IRD’s remission of interest on underpaid provisional tax for the 2020-21 income year for those using the standard uplift or estimation methods who are impacted by COVID-19.
Suitable for
Businesses who are uncertain how their year will play out due to the global pandemic.
Drawbacks of IRD’s offering
IRD’s recently announced relief is only for smaller- and medium-sized businesses with a liability of less than $1 million who can demonstrate their ability to forecast what they owe for the year at one or more provisional tax dates was “significantly adversely affected” by COVID-19.
In other words, any underpayment needs to be due to a change in circumstance that is totally out of their control (i.e. the border reopening), not human error. Those who have tools to forecast what they owe – as well as those who make no effort to forecast – are unlikely to qualify for the remission.
Someone not impacted by COVID-19 is expected to pay on time and in full.
The other thing to note is IRD will decide who qualifies for relief on a case-by-case basis after a taxpayer files their return for the 2020-21 income year.
Again, this is a discretionary power.
That poses a significant risk if someone is touch and go as to whether they meet the criteria for assistance. After all, if IRD declines their application, they will be up for IRD interest from the date of their first instalment for the 2020-21 income year.
TMNZ’s solution
A taxpayer facing uncertainty over their profitability for the upcoming year who does not want to pay provisional tax based on an uplift calculation from a pre-COVID-19 time has another option if they are unlikely to qualify for this remission.
They can make their provisional tax payments based on how their year is unfolding – and then use TMNZ to wipe late payment penalties and reduce the interest cost they face if they end up underpaying their tax.
We offer significant savings on IRD interest.
TMNZ let’s a taxpayer apply provisional tax that was originally paid to the tax department on the date(s) it was originally due against their liability.
As such, IRD treats it as if they paid on time once it processes this their tax pooling transaction. This eliminates any late payment penalties.
A taxpayer has up to 75 days from their terminal tax date for the 2020-21 income year to pay any underpaid provisional tax with TMNZ.
3. Using tax pool deposits as a line of credit
Alternative to
IRD’s temporary tax loss carry-back scheme.
Suitable for
Taxpayers who hold deposited funds in TMNZ tax pool in urgent need of cash.
Drawbacks of IRD’s offering
Under the temporary tax loss carry-back scheme, a taxpayer who expect to make a loss in either the 2019-2020 or 2020-2021 income year will be able to estimate that loss and use all (or a portion of it) to offset any profit made in the previous year.
This allows those who need cash urgently to receive a refund of any income tax paid in the previous year.
However, some taxpayers are nervous about using the regime as they are uncertain how the 2020-21 income year will play out.
There are consequences if they overestimate the loss they are carrying back and this results in tax payable in the previous profit year.
In a nutshell, someone will incur IRD interest all the way back to the first instalment date of the profit year.
This is because they have to file an estimate with IRD in order to use the scheme. That subsequently takes them out of the interest concession rules that apply for standard uplift taxpayers.
TMNZ’s solution
Tax pooling allows someone short on cash to temporarily withdraw deposits they hold in the pool.
A taxpayer receives from TMNZ an amount equal to their deposited funds (minus an upfront interest cost), while having the option to restore those deposits at their original deposit date(s) when their cashflow situation improves.
Unlike the temporary tax loss carry-back scheme, there is no need to be in a loss position to access funds.
The ability to stay within the standard uplift interest concession rules also remains intact as there is no requirement to file an estimate with IRD.
Someone needs to give consideration to their imputation credit account balance before withdrawing any tax pool deposits.
It’s also important to note that funds taken out of the pool switch from own to purchased funds.
That means to reinstate the deposit(s) at their original dates, a taxpayer must have paid back and transferred the core tax from the tax pool to their account at IRD within 75 days of their terminal tax date for that tax year.
About TMNZ
TMNZ operates with the blessing of IRD and under legislation set out in the Income Tax Act 2007 and Tax Administration Act 1994.
Not only are we New Zealand’s first and oldest tax pooling provider, it was our company founder, Ian Kuperus, who came up with the concept and worked with officials to set up a framework.
TMNZ has been creating a better tax environment for businesses since 2003.
For more information about tax pooling, please feel free to contact us.
Increased provisional tax threshold: Legislative application
The rules that determine whether someone must pay provisional tax are still the same in terms of how IRD applies them.
However, what’s not the same for the 2021 and future tax years is the point at which they are applicable to a taxpayer.
That’s the important thing to remember if you’re struggling to wrap your head around how the increase to the provisional tax threshold works. (Don't worry, you're not the only one given the number of questions TMNZ has fielded recently from accountants in relation to this topic.)
Indeed, the legislation regarding whether a taxpayer has an obligation to pay provisional tax – particularly the rules found in sections RC3, RC6, RC9, RC13 and RC14 Income Tax 2007 – is essentially read and applied by IRD in the same manner it was before this change happened, albeit residual income tax (RIT) of $2500 has now been replaced with RIT of $5000.
That’s it. Nothing else is different.
To illustrate that point, let's look in more detail at how the provisional tax threshold increase impacts the 2021 tax year.
How it works in practice
Under the standard uplift method, provisional tax for the upcoming year is based on either:
- The RIT for the 2020 tax year uplifted by 105 percent (CY-1); or
- The RIT for the 2019 tax year uplifted by 110 percent (CY-2) if the 2020 tax return has not been filed and doesn't need to be until 31 March 2021.
If a taxpayer is basing an instalment for the 2021 year on CY-1 – or CY-2 if they have yet to file CY-1 – and the RIT in the return that is being used to work out what is due and payable at that point in time is $5000 or less, then they will have no obligation to pay provisional tax at that particular instalment date.
It does not matter one iota if, during the prior year that is being used for the uplift calculation, they were a provisional taxpayer due to their RIT in that year exceeding the old threshold of $2500.
The new threshold is all that matters.
Example
Meet Karen. She is a taxpayer with a 31 March balance date who has used the standard uplift method to calculate her provisional tax for the past two years.
She has the following RIT and filing date information.
| Tax Year | RIT | Date tax return was filed |
| 2019 | $4500 | 31 March 2020 |
| 2020 | $35,000 | Yet to file |
Her accountant has an extension of time arrangement with IRD and tells her he won’t be filing her 2020 tax return for at least another six months. As such, he is going to use her 2019 RIT as the basis to work out her first payment for the upcoming year.
Karen’s first provisional tax instalment for the 2021 tax year is due on 28 August 2020 (P1).
However, because her RIT for the 2019 tax year was $5000 or less, she won't have to make a payment at P1. The uplift amount due and payable will be $0.
The fact she was a provisional taxpayer during the 2019 tax year, albeit under the old threshold, means nothing.
If Karen gets to 15 January 2021, the date of her second provisional tax instalment (P2), and her accountant has still not filed her 2020 tax return, then she will not have to make a payment at P2 either. Again, the uplift amount due and payable will be $0.
Only when her accountant files the 2020 tax return will she become a provisional taxpayer. This is because the RIT for that year exceeds the $5000 threshold.
Karen’s accountant must legally file the 2020 tax return by 31 March 2021.
Assuming this is the date they intend to file the previous year’s return, then she will need to pay something at 7 May 2021 (P3).
What is the amount she should pay P3?
That's a good question. What Karen should pay at P3 really depends on how her 2021 tax year unfolds.
It will be ONE of the following:
- Nothing – if the 2021 RIT is going to be 5000 or less. This is because Karen is not a provisional taxpayer under section RC3 (1) Income Tax Act 2007 for that year. Any income tax she does owe for 2021 tax year will be due and payable at her terminal tax date because she meets the safe harbour interest concession rules found in section 120KE (1) and (2) Tax Administration Act 1994.
- The 2020 RIT uplifted by 105 percent – if she thinks the 2021 liability will be less than $60,000. Any remaining balance to settle what she owes for the 2021 tax year will be due and payable at her terminal tax date, again because she meets the safe harbour interest concession rules mentioned above.
- The expected 2021 RIT – if Karen expects this to be $60,000 or more. This is because she would fall out of safe harbour and into the rules found in section 120KBB Tax Administration Act 1994. These rules see someone who pays the uplift amount on time and in full at P1 and P2 only incur IRD interest from P3 if they have not settled their liability for the year in full by this date.
- The expected 2021 RIT – if Karen expects this to be LESS THAN the uplifted 2020 RIT. Again, the interest rules in section 120KBB will apply if what she pays at P3 turns out not to be enough to settle the actual liability for the year.
Please contact us if you have any questions about the increase to the provisional tax threshold.
We're happy to help.