Anti-money laundering requirements and tax pooling
Updated 12 October 2020
Tax Management NZ (TMNZ) must now conduct a limited form of customer due diligence on all clients as part of recent changes to anti-money laundering (AML) requirements.
As such, we will be collecting information about the taxpayers using our service and asking anyone acting on their behalf to supply some basic personal details.
We also need to see evidence that a taxpayer has an actual or expected liability at Inland Revenue (IR) before we transfer tax from our tax pool.
Transactions cannot be completed until we receive this information from you.
Information we require from a taxpayer
For a company, limited AML requires us to collect and hold information about them that is publicly available. We will obtain this information ourselves from the New Zealand Companies Office. You don’t have to do this.
For an individual or a trust, we only need information from a person acting on their behalf (see below).
What person acting on behalf means
As part of the limited AML requirement, TMNZ must collect the identity information from at least one individual who has the authority to act on behalf of a taxpayer using our service.
For tax agents, this can be either of the following:
- A partner, director or owner of your firm; or
- An agent at your firm who is linked to the taxpayer (e.g. the taxpayer’s accountant). It can also include the person who entered the transaction for the taxpayer or the person who receives email correspondence regarding the taxpayer’s transaction if this person is different from the accountant.
For a taxpayer, this can be ANY of the following:
- The taxpayer themselves, if they are an individual.
- An employee who has authority to act on behalf of the taxpayer (if they are a company).
- A trustee of the taxpayer (if they are a trust). We require a copy of the trust deed to ensure this person has authority to act.
The person above requires a TMNZ dashboard login and must either have visibility to view all taxpayers registered with your accounting firm or be linked to the specific taxpayer or transaction. This is not applicable if the taxpayer is an individual or the person acting on behalf is a trustee.
You have the option of supplying the tax agent or taxpayer identity information as part of limited AML.
Identity information we require from a person acting on behalf
TMNZ must collect the following identity information as part of the limited AML requirement if you are a person acting on behalf of the taxpayer:
- Your full legal name.
- Date of birth.
The above is required under section 15 Anti-Money Laundering and Countering Financing of Terrorism Act 2009.
Any personal information TMNZ holds about you or your clients is stored on a secure system that has been penetration tested to ensure this data will not be compromised.
Confirmation of tax liability
The limited AML requirement means TMNZ must also ascertain that a taxpayer using our service has a liability or expects to have a liability with IR before we can complete their transaction.
Proof of this can be in the form of:
- Written confirmation from a tax agent that the taxpayer is expecting to have a liability at IR. (This can be an approximation if the exact figure is not known at the time.)
- A copy of the taxpayer’s myIR transaction detail report for the relevant tax year.
- Standard uplift amounts determined from prior year RIT information. Prior year RIT information must be determined from copies of IR correspondence or written confirmation from a tax agent.
- A copy of any provisional tax estimate submitted to IR by the taxpayer.
- Any correspondence from IR showing a liability to pay in respect to the relevant tax year.
We only require confirmation of a taxpayer’s liability when we transfer funds from the tax pool to their IR account.
Does the information provided need to be verified?
A partial exemption granted to the tax pooling industry means there is no need for TMNZ to carry out the verification requirements that apply under full AML.
In other words, we DO NOT need you to provide copies of documents to substantiate the information you provide.
Full AML, including verification, is still required for refunds or sales that meet our policy thresholds.
AML has been around for a long time – why are you asking for this information now?
Previously, TMNZ only carried out AML if a taxpayer was requesting a refund or sale over a certain amount from the tax pool.
However, our AML regulator – the Department of Internal Affairs (DIA) – is making tax pooling providers hold more information about every taxpayer using our service and anyone with authority to act on their behalf.
This limited AML requirement from DIA is in response to the accounting profession being brought into the AML regime. It has been in effect since 1 July 2020.
As a reporting entity captured under the Act, TMNZ must comply with the AML regulations set out in the legislation and any other requirements issued by DIA.
Please feel free to contact us if you have any questions. We’re happy to help.
Disclaimer: This article is correct as at 12 October 2020. It is subject to change.
COVID-19 provisional tax interest remission: What you need to know
Updated 11 August 2020
Small- and medium-sized taxpayers may no longer have to pay interest if they underpay provisional tax as a result of miscalculating the impact COVID-19 has on their profitability for the 2020-21 income year.
However, while this concession is a major boon ahead of the 28 August 2020 payment date for those strapped for cash in the wake of the global pandemic, it is subject to meeting certain criteria.
Someone must be able to prove to IRD that any underpayment(s) that arise from getting their forecast wrong was due to an unforeseen change in circumstance that was out of their control – IRD calls this the ‘who would have thought that would happen?’ test – not human error, before the tax department will exercise its new discretionary power.
A taxpayer won't be able to benefit from this concession if they make no effort whatsoever to forecast their liability.
Background - how it will work
The provisional tax interest remission was part of the COVID-19 Response (Further Management Measures) Legislation Bill (No 2) that was passed under urgency in Parliament this week. Please refer to schedule 2 of the Bill.
It’s available to taxpayers who:
- Use the standard uplift or estimation method to calculate their payments;
- Have an income tax liability for the 2020-21 year of less than $1 million;
- Are not using the temporary tax loss carry-back scheme; and
- Their ability to make a reasonably accurate forecast of that year's income tax liability on one or more of their provisional tax instalment dates was significantly adversely affected by COVID-19.
Under proposed new section 183ABAC Tax Administration Act 1994, someone who meets the criteria above can ask IRD for a remission of any interest that has accrued before their terminal tax date on underpaid tax for the 2020-21 income year.
If the taxpayer asks for the relief as soon as practicable after filing their return for that year, IRD may agree to waive interest on any shortfalls if it is satisfied the provisional tax they paid was a fair reflection of how their business was performing at the time.
It applies for interest accrued on underpaid tax amounts between 31 March 2020 and someone’s terminal tax date for the 2020-21 income year (both dates inclusive).
Normal interest rules will apply for those who are not eligible for this concession. These will differ depending on whether a taxpayer uses the standard uplift or the estimation method to calculate their 2020-21 income year payments. Please be aware of that.
How does s183ABAC differ from s183ABAB?
Section 183ABAC of the Act deals with the remission of interest on underpaid provisional tax for the 2020-21 income tax year where the taxpayer could not forecast their tax liability because of COVID-19.
It addresses the difficulty in determining how much tax should be paid, particularly at the first and second instalment dates.
Section 183ABAB – introduced earlier this year – deals with the remission of interest if COVID-19 prevented a taxpayer from making on time a tax payment that was due on or after 14 February 2020.
It addresses their ability to make the tax payment.
That distinction is important to note.
TMNZ’s thoughts
We welcome IRD’s decision to cut taxpayers still reeling from the impact of the pandemic a break for the upcoming year.
Many businesses don’t want to make their 2020-21 provisional tax payments based on an uplift calculation from a pre-COVID time. Being able to pay provisional tax based on how a business is expected to perform this year – without the seven percent interest consequence that comes with it if the forecast turns out to be incorrect – will offer cashflow benefits at a time when many folks are looking to recover, rebuild and get back on their feet.
Well done.
Kudos must also go to our friends at Chartered Accountants Australia and New Zealand. They were the ones who lobbied IRD for the concession. It would not have come to pass if it wasn’t for their work.
Who can apply for the remission?
IRD has made it clear this is not a free pass for everyone. They expect someone not impacted by COVID-19 to pay on time and in full.
Any underpaid provisional tax that arises as a result of a taxpayer miscalculating their forecast for the 2020-21 income year must be due to a ‘who-would-have-thought-that-would-happen?’ event. That’s how to interpret “significantly adversely impacted by COVID-19” in the context of s183ABAC.
For instance, the New Zealand border reopening in late January next year and those in the tourism sector experiencing a late upswing in profitability because of that would be classified as such an event. In that situation, IRD would agree to remitting the interest someone will incur on underpaid provisional tax at any instalment dates that were due and payable prior to this event happening.
However, someone who has the resources available to accurately forecast their liability is unlikely to get much sympathy if they get it wrong.
IRD says it will determine these 'who-would-have-thought-that-would-happen? events on a case-by-case basis. They plan to publish examples on their website to provide more clarity.
Someone is also encouraged to keep a record of any information that can justify why they made the payment they did at the time. This is important. They may request to see supporting documents when reviewing applications for relief.
Be warned: IRD does not want taxpayers abusing a high-trust concession. Expect them to act accordingly if they discover anyone is taking the you-know-what.
Other considerations
Here are a few other things to note about the provisional tax interest remission.
- IRD’s ability to wipe interest is discretionary, not guaranteed. Whenever discretion is in the mix, inconsistencies can arise. For instance, TMNZ is seeing this in terms of how department staff is applying the interest remission rules in s183ABAB. Something similar may happen here.
- Moreover, there is less chance of IRD waiving interest if a taxpayer significantly underpays provisional tax at the date of their final instalment than if they pay short at their earlier payment dates. That will certainly be the case for larger and more sophisticated taxpayers who are better able to forecast how their business is tracking. And it makes sense, too. The first instalment is due early in the income year when it can be difficult to tell how things will unfold. The second instalment is due about two-thirds of the way through. There’s still a chance something drastic could happen after this that impacts a person's ability to forecast their payment accurately. However, the date of the final instalment is typically a month after year-end. By this time, someone should have a reasonable expectation of their liability given they have completed their year.
- A taxpayer is going to have to file their return for the 2020-21 income year before asking for relief. Logically, that makes sense as IRD calculates interest and penalties retrospectively. However, that poses a big risk – especially as IRD may turn around and say ‘no dice’. That would leave someone exposed to interest on the underpaid tax and potentially late payment penalties too. Interest and late payment penalties will be from the date(s) of underpayment. The question will be: Does a taxpayer have enough faith to trust IRD?
- Whatever the case, we recommend you continue to use the standard uplift as the basis to calculate provisional tax payments for the 2020-21 income year. Why? The reason is simple. If IRD rejects an interest remission request, then interest on underpaid tax at instalment dates prior to the last one will be charged on the lesser of the standard uplift instalment amount or a third of the actual income tax liability. Interest at the date of the final provisional tax instalment will be charged on the remaining balance to settle the income tax liability for the year. Those who estimate provisional tax at any time during their year don’t enjoy this ‘lesser of’ protection. They will come badly unstuck if IRD says no to their request for relief and the income tax payable turns out to be MORE THAN the prior year’s result.
The role of tax pooling
For taxpayers wanting certainty of outcome when it comes to managing cashflow and provisional tax payments at this uncertain time – or those who do not meet the criteria to receive a remission of interest from IRD – tax pooling is the next best option.
That’s because acceptance is guaranteed, and no security or financial information is required.
We can offer payment flexibility and deferrals that are on a taxpayer’s terms. We can also eliminate late payment penalties and reduce the interest someone has to pay if IRD declines their request.
Yes, we charge a small interest cost to use our service.
However, this may be negligible. After all, we are a known quantity that can offer peace of mind and our payment arrangements are easier to set up.
Feel free to contact your TMNZ account manager if you have any questions about the provisional tax interest remission.
Disclaimer: This article is correct as at 11 August 2020. It is subject to change. TMNZ will update this article as and when it receives new information from IRD. We encourage readers to check this page regularly.
GST ratio timeframe extended
IRD has extended the timeframe for taxpayers to elect to use the GST ratio method in the wake of COVID-19.
They now have until 19 August 2020 or the day before the start of their 2020-21 income year, depending on which is later, to opt in.
Normally someone who is eligible to calculate their provisional tax on this basis must choose to do so before the start of their new tax year.
For example, a taxpayer with a 31 March balance date would have to inform IRD they wish to use the GST ratio method for their 2020-21 income year on or before 31 March 2020.
However, IRD recognises that COVID-19 may have made it difficult for someone to make this election within that required timeframe and has decided to grant more time.
They are also giving someone 10 working days to make their provisional tax payment(s) once they are notified of their GST ratio percentage.
If a taxpayer completes payment within that timeframe, IRD will waive any penalties and interest.
What is the GST ratio method?
The GST ratio method lets someone pay provisional tax based on a percentage of their taxable supplies.
A taxpayer can choose to use this calculation if:
- Their income tax liability for the previous year wasn’t more than $150,000.
- They file their GST returns monthly or every two months.
- They aren’t operating as a partnership or a look-through company.
IRD calculates the GST ratio percentage figure by dividing the previous year's income tax liability by the total taxable supplies for the corresponding income year.
Someone using this method pays provisional tax six times a year.
Deadline approaching for non-COVID-19 taxpayers
Options in the marketplace are available to help those NOT affected by COVID-19 pay their TMNZ arrangement for the 2019 tax year within the required legislative timeframe.
We are mentioning this as we know there will be taxpayers short on cash right now who unfortunately won't meet the criteria to receive the deadline extension announced by IRD last week.
The 75th day is coming
Someone has 75 days from their terminal tax date to pay the income tax they owe via TMNZ.
IRD says this standard rule applies if the taxpayer is not impacted by COVID-19.
As such, those with a 7 April 2020 terminal date must settle their Flexitax® or Tax Finance arrangements for the 2019 tax year by no later than 22 June 2020.
Legislation prevents TMNZ from assisting beyond this date. Please see sRP17B (4) Income Tax Act 2007.
The final date TMNZ can accept payment is 18 June 2020.
What happens if I don’t pay TMNZ by 22 June 2020?
Unpaid Flexitax® or Tax Finance balances will incur IRD interest (UOMI) and late payment penalties.
The department will charge UOMI and late payment penalties from the date the tax payment(s) were originally due. Someone will need to deal with them directly to get these remitted.
We encourage taxpayers to think about their options if they will struggle to pay their 2019 income tax arrangements with TMNZ by the legislative deadline.
There is a plethora of services in the marketplace.
Here are three of them.
Interface Financial Group
The Interface Financial Group offers an invoice discounting service. It provides money straight away to clients by purchasing your unpaid invoices.
It pays up to 90 percent of the invoice amount. The only cost is a discount fee it earns on the invoice(s) it purchases from a business.
Your customers then pay the full invoice amount to The Interface Financial Group on the due date.
The service can be used at the sole discretion of business owners and is provided on a use-it-as-you-need-it basis.
Spotcap
Spotcap provides unsecured business loans of up to $250,000 to small- and medium-sized businesses.
You can complete this process online. They make credit decisions within 24 hours.
Spotcap gives immediate access to a credit line (from $10,000 to $250,000) upon approval. You pay a drawdown fee once you make a withdrawal and will incur interest of the amount you draw down.
You create a business loan every time you draw down. The loan is repayable monthly (one to 12 months).
Lock Finance
Lock Finance offers several lending facilities to help with cashflow depending on a business’ situation.
These include debtor finance, factoring, working capital finance and trade finance.
Lock Finance tends to focus on a business’ overall position to assess security rather than serviceability.
TMNZ has no affiliation with Interface Financial Group, Spotcap and Lock Finance. We are not endorsing their services and do not receive any referral fees or commission from them. This information is provided only as a service to clients on options in the market. We encourage clients to do their own due diligence as we have done.
COVID-19: IRD extends tax pooling deadline
Updated 19 June 2020
Anyone impacted by COVID-19 will have 365 days after their terminal tax date to settle 2019 income tax arrangements with TMNZ, subject to meeting certain criteria.
IRD has used its new discretionary powers in s6I Tax Administration Act 1994 to extend the legislative deadline after recognising the cashflow difficulties some taxpayers face in the wake of the global virus and the Government’s response to it.
It means those with a terminal tax date of 7 April 2020 now have until 7 April 2021 to satisfy their Flexitax® or Tax Finance arrangements for the 2019 tax year.
Normally they have just 75 days after their terminal tax date to pay.
For taxpayers with a different terminal tax date, the extension to settle 2019 income tax will apply if their 75th day fell during a period that was impacted by COVID-19.
That means those with 15 January 2020, 7 February 2020, 7 March 2020 and 7 April 2020 terminal tax dates can request extra time to pay.
TMNZ welcomes IRD’s decision.
We wish to thank officials at the department for recognising the impact COVID-19 is having on our clients in relation to settling their 2019 income tax obligations within the required timeframe, as well as engaging with us to come up with a solution.
Eligibility criteria
The extension is subject to a taxpayer completing an application form and meeting a couple of conditions.
Firstly, they must have experienced – or expect to experience – a significant decline in actual or forecast revenue due to COVID-19 between January 2020 and July 2020 that either:
- Prevents them from satisfying their existing arrangement for the 2019 tax year with TMNZ within the normal legislative timeframe; or
- Meant that prior to this extension, they were unable to enter into an arrangement for the 2019 tax year with TMNZ.
If someone has received the Government wage subsidy, then this will satisfy the requirement of a reduction in revenue due to COVID-19.
If they have not, they will need to confirm that, after meeting their on-going business expenditure, they DO NOT have any of the following immediately available to pay their tax obligation:
- Cash reserves
- Insurance proceeds
- Banking facilities.
Secondly, a taxpayer must have their TMNZ arrangement for the 2019 tax year in place on or before 21 July 2020. Our recommendation is that you set this up as soon as you can.
Thirdly, they will need to supply a cashflow forecast (or other comparable information if they are a small business).
IRD is asking us to collect and check this forecast as it wants proof that the taxpayer requesting an extension will have the funds available to meet their liability within the new timeframe.
Someone must supply this forecast even if they received the wage subsidy.
Many clients and tax agents will be able to access this through their accounting software. If someone does not have a cashflow forecast template, here is one that IRD sends those wishing to enter into a payment plan.
Exception to the cashflow forecast criteria
If a taxpayer intends to settle their tax liability before 21 July 2020, they DO NOT need to provide a cashflow forecast.
Payment frequency
We CANNOT accept arrangements to delay the payment of all your outstanding tax until the last day.
IRD wants taxpayers to make regular payments towards their liability. These payments can be made weekly, fortnightly or monthly.
Please contact us if you have circumstances that will make this difficult.
We can vary arrangements part way through if required.
A taxpayer's final payment must be received no later than 365 days past their terminal tax date for the 2019 tax year.
TMNZ’s interest rates for extension arrangements are the same as they are for other transactions.
Key dates to note
The 365-day extension deadline will differ slightly for taxpayers with the terminal tax dates in bold. Please be mindful of this when completing the application form.
For those whose terminal tax date for the 2019 tax year is 15 January 2020, 365 days after this date is actually 14 January 2021.
This is because 2020 has an extra day due to being a leap year.
For those whose terminal tax date for the 2019 tax year is 7 February 2020, their actual 365th day is 9 February 2021.
There are two reasons for this.
The first is that 7 February 2021 falls on a Sunday. The second is Waitangi Day (6 February) is ‘Monday-ised’ to 8 February.
For those whose terminal tax date for the 2019 tax year is 7 March 2020, their 365th day is 9 March 2021.
This is because:
- The due date for this 2019 terminal tax payment defaulted to 9 March 2020 as the seventh was on a Saturday this year; and
- IRD has applied the 365-day extension from 9 March 2020.
The application process
You can find the extension application form here. Please complete and send this along with your cashflow forecast to support@tmnz.co.nz.
Someone can send us the completed application form immediately and provide the cashflow forecast in the next three weeks.
Don't hesitate to call
The process around this extension has been introduced at short notice, so please bear with us.
As always, if you have any questions, feel free to contact your TMNZ account manager or our customer support team. We're here to help.
Disclaimer: This article is correct as at 19 June 2020. It is subject to change. TMNZ will update this article as and when it receives new information from IRD regarding the extension of the 2019 tax pooling deadline. We encourage readers to check this page regularly.
How filing late and losing EOT impacts provisional tax payments
Losing extension of time (EOT) due to filing income tax returns late means someone can only use 105 percent of the previous year's residual income tax (RIT) when calculating their provisional tax payments.
That's because if a taxpayer fails to provide their returns(s) on time, IRD's system defaults to using the date by which they were legally due to file the return for that year – not the date on which they furnished the return.
Only if someone files their return(s) within the required timeframe will the actual date of filing be used.
This is important to remember, particularly when using TMNZ’s Tax Calculator.
An overview of IRD's system and TMNZ's Tax Calculator
When a taxpayer files their return for the most recently completed year, IRD’s system uses the lesser of standard uplift or a third of their RIT to determine the provisional tax instalment amounts due and payable for that year.
As per s120KBB (3B) Tax Administration Act 1994, the standard uplift instalment can either be the lesser of the 105 percent or 110 percent calculation. You can read more about that here.
TMNZ’s calculator follows the same logic as IRD's system.
To determine the instalment amounts due and payable, it requires a taxpayer's RIT and filing date information for the past three years:
- The current tax year or most recently completed tax year (e.g. 2020).
- The tax year prior to that (e.g. 2019).
- The tax year two years prior to that (e.g. 2018).
Whereas IRD has access to this information, we unfortunately don't. That's why we ask users to enter these details themselves.
If someone was late in providing a return and lost their EOT in any of the years before the current or recently completed tax year, then it’s crucial they know the correct filing date to use, otherwise the calculator will spit out incorrect instalment amounts.
After all, garbage in, garbage out.
Example
A taxpayer with a 31 March balance date decided to use TMNZ’s Tax Calculator to work out the provisional tax payable for the 2019 tax year. They did not pay any income tax for that year and wanted to purchase it from TMNZ to reduce their interest cost and eliminate late payment penalties.
RIT and filing date information for the past three years
| Tax Year | RIT | EOT | Legal date by which they must file their return | Date they file their return | Return status |
| 2017 | $6000 | Yes | 31 March 2018 | 1 May 2018 | Late |
| 2018 | $10,000 | No | 7 July 2018 | 16 January 2019 | Late |
| 2019 | $25,000 | No | 7 July 2019 | 30 June 2019 | On time |
As you can see, the taxpayer has lost their EOT for the 2018 tax year due to filing their 2017 return late. Their 2018 return was also late, so they don’t have EOT for their 2019 tax year either. However, the taxpayer did file the latter year’s return on time.
This means when using TMNZ’s Tax Calculator they must enter into the ‘date of filing’ field the respective legal dates by which they were required to furnish the returns for the 2017 and 2018 tax years.
For the 2017 tax year, this will be 31 March 2018 as their EOT was still applicable. For the 2018 tax year, this will be the non-EOT deadline of 7 July 2018.
Legislation states anyone who has an early balance date (i.e. the period between 1 October and 31 March) must file their return by 7 July if they do not have EOT. Those without EOT who have a late balance date (i.e. the period between 1 April and 30 September) must file their return on the seventh day of the fourth month after their year-end.
As the 2019 tax return was provided within the mandatory timeframe, the taxpayer can use the actual date on which they submitted that year’s return to IRD.
Recap: How things should look in TMNZ’s Tax Calculator
| Tax year | RIT | Date of filing |
| 2017 | $6000 | 31 March 2018 |
| 2018 | $10,000 | 7 July 2018 |
| 2019 | $25,000 | 30 June 2019 |
How this impacts provisional tax instalments
In this situation, the 2019 provisional tax instalments will be based on the standard uplift amount as this is lower than a third of the RIT for that year.
However, ALL uplift payments will be based on 105 percent of the 2018 RIT.
That’s because the taxpayer lost EOT for the 2018 tax year and, therefore, was supposed to have filed their return for that year on 7 July 2018 – before the date of their first provisional tax instalment for the 2019 tax year (this being 28 August 2018).
As such, they cannot base any payments off 110 percent of their 2017 RIT.
Therefore, the 2019 instalment amounts due and payable as per IRD's system – and what TMNZ's Tax Calculator will tell them to purchase – at each date are as follows:
- 28 August 2018: $3500
- 15 January 2019: $3500
- 7 May 2019: $3500
TMNZ's calculator will also show the taxpayer needs to purchase at their terminal tax date the final balance of $14,500 to settle the 2019 RIT, as their RIT is less than $60,000.
Please note the terminal tax date will have been 7 February 2020 due to them losing their EOT. They would have had 75 days from this date to purchase from TMNZ the 2019 income tax they require.
Don't forget the flow-on effect
It is also important to remember that because there was a requirement to file the 2019 return by 7 July 2019, the taxpayer can only use the 105 percent uplift calculation for their 2020 provisional tax payments.
Again, this is due to the filing date for the 2019 return being before the first instalment date for the 2020 year.
So, using the RIT information above, the standard uplift payments for the 2020 tax year will have been:
- 28 August 2019: $8750
- 15 January 2020: $8750
- 7 May 2020: $8750
For those using the standard uplift method, the 105 percent calculation will continue to be the only option for them to determine provisional tax payments until the taxpayer re-applies for their EOT.
Legislative references
You can find the legislation pertaining to filing dates of tax returns and EOT in s37 and s38 Tax Administration Act 1994.
Please feel free to contact us if you have any questions.
Tax loss carry-back scheme: Important considerations
Standard imputation (ICA), ownership continuity and grouping rules still apply under the new tax loss carry-back scheme, while anyone who overestimates their loss will face IRD interest (UOMI) from the date of their first provisional tax instalment for the previous year.
Moreover, company profits already paid out via shareholder-employee salaries or dividends are unable to be reversed to take advantage of the scheme.
A basic overview of the scheme
Under the temporary scheme, taxpayers who expect to make a loss in either the 2020 or 2021 tax 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.
It applies to companies, trusts, and individuals (other than those deriving only PAYE income) and those that operate through partnerships and look-through companies.
The legislative reference is sIZ8 Income Tax Act 2007.
Here are some of the things you need to consider before electing to use the scheme.
The ICA rules
Be mindful that standard ICA rules apply as part of the tax loss carry-back.
That means in order to obtain a refund of income tax, a taxpayer must have an ICA credit balance at the end of the most recently ended tax year (i.e. 31 March 2020) that is at least equal to the refund amount.
Alternatively, they can complete an interim ICA return up to the date of their refund request.
Provisional tax deposits held in a tax pooling account that are refunded under the loss carry-back scheme will be subject to the imputation debit rules that normally apply for pooling.
Given the potential exposure to imputation penalty tax of 10 percent and UOMI, the timing of tax pooling refunds due to a loss being carried back should be considered on an ongoing basis to mitigate this risk.
The results can be catastrophic if they’re not.
We strongly encourage you to contact us before you refund any balances from the pool.
Ownership continuity and grouping rules
The ownership continuity requirements that relate to the loss carry-forward provision, and the normal grouping rules, also apply under the tax loss carry-back scheme.
This means a company must have maintained at least 49 percent common ownership throughout the loss year and preceding profit year.
For entities part of a group, the group must have retained 66 percent common ownership throughout the loss year and the preceding year.
That said, there are provisions in the tax loss carry-back legislation that deal with part years in the ownership continuity period.
IRD has examples of this in its commentary for the COVID-19 Response (Taxation and Other Regulatory Urgent Measures) Bill.
Time bar rule
IRD can reassess both the loss year and the preceding profit year at the same time – even if the preceding profit year is time barred.
That is something to keep in mind.
Situations where the scheme cannot be used
A taxpayer must have taxable income in the previous year.
Given that, a company that has already paid out its profit via shareholder-employee salaries will not have any taxable income to which they can apply future losses they wish to carry back.
This is also the case if the taxpayer has already distributed its profits as a dividend or made a subvention payment.
Therefore, they cannot use the scheme.
Taxpayers who have ringfenced rental losses will not be able to carry back losses either.
It's the same with multi-rate PIEs. This is because they have a cash-out for losses that provides immediate tax relief in this situation.
Situations where it will offer limited benefit
A taxpayer can only carry back losses one year (e.g. from the 2021 tax year to the 2020 tax year).
As such, there will be situations where the scheme will only free up a small refund of income tax.
Example one
| Tax year | Taxable income |
| 2019 | Massive profit |
| 2020 | Modest profit |
| 2021 | Huge loss forecast |
Someone can only carry back the huge forecast loss for 2021 to the extent of the taxable income in 2020. As you can see, this is considerably lower in comparison to the 2019 tax year.
This will result in a very small refund of tax under the scheme.
Example two
| Tax year | Taxable income |
| 2019 | Massive profit |
| 2020 | Small loss |
| 2021 | Huge loss forecast |
Someone can only carry back the small loss from 2020 to the 2019 year. The huge forecast loss from 2021 cannot be utilised as part of the scheme.
Once again, this will result in a small refund of tax.
Here’s another thing to remember.
If the taxpayer is part of a wholly owned group of companies, the loss amount they can carry back is limited to the amount that cannot be offset against the profits within that group during the loss year. In other words, the loss must be used within the group first during the loss year.
UOMI ramifications
A taxpayer can re-estimate provisional tax in the previous year as many times as they like under the scheme. They can keep doing so up until the date they file their return for the loss year (or the date by which they must legally file this return if this is earlier).
However, re-estimating provisional tax means the UOMI rules in s120KB Tax Administration Act 1994 will apply.
That means if someone overestimates their tax loss carry-back for the loss year – resulting in tax to be paid later due to receiving a larger refund to which they were entitled – they will be liable to pay UOMI from the date of their first provisional tax instalment in the preceding profit year.
Interest will be charged on the difference between the income tax they owe for the profit year and the income tax they paid in that year.
The income tax they owe for the profit year is based on the original taxable income for that year, minus the actual loss from the loss year. The tax they paid in the profit year is based on the original taxable income for that year, minus the total loss year refund they initially received due to overestimating their loss.
The amount on which UOMI is charged will be split evenly across the number of provisional tax instalments payable for the profit year.
Section 183ABAB of the Act – which gives IRD the power to remit UOMI for taxpayers who cannot make tax payments after 14 February 2020 due to COVID-19 – will not be able to assist.
TMNZ can help reduce UOMI
However, someone who is incurring UOMI due to overestimating their tax loss carry-back can use TMNZ to significantly reduce the interest cost on the additional tax payable if they are within 75 days of their terminal tax date for the profit year (or 60 days from the date IRD issues a notice of reassessment if the profit year is a closed income year).
Flexitax® allows them to apply backdated tax paid to IRD on the date it was originally due against their liability.
As such, IRD will treat the taxpayer as having paid on time once it processes this transaction, remitting any UOMI and late payment penalties incurred.
It’s a safety net for someone who has a ‘mare forecasting their loss.
It may pay to wait and see
For many taxpayers, the most recent tax year would have ended on 31 March 2020.
Up until the start of that month, when the impacts of COVID-19 really hit, everything was running smoothly. It’s quite likely their profitability was not significantly impacted.
But there’s a strong likelihood it will be during their 2021 tax year.
However, as it’s still early days in that year, having to estimate a loss to carry back to 2020 this far out is quite difficult.
Honestly, who really knows what the landscape will look like next month – let alone by 31 March 2021 – given the clouds of uncertainty lingering above the domestic and global economies in the wake of COVID-19?
The risk of incurring UOMI if they get it wrong means they may wish to err on the side of caution with their loss estimate and then re-estimate as the year progresses once the picture becomes clearer.
The other option is to hold off until later. That's what many appear to be doing at this stage given the low uptake.
Yet a downside of playing it safe or waiting a little longer is the taxpayer may not receive the full cashflow injection they are seeking right now.
Does their desperate need for immediate funds outweigh the potential UOMI consequences down the track, or can they afford to wait?
That’s something a taxpayer is going to need to weigh up before opting in.
Don't forget tax pool deposits
For those holding provisional tax deposits in TMNZ’s tax pool who want access to their payments now – but don’t yet have the confidence to file a loss carry-back – there is another option.
They can take a line of credit against their deposits, for interest rates below three percent. They also have the option of restoring those deposits at their original deposit dates once their cashflow situation improves.
However, there are a couple of things to note.
For starters, the ICA position needs to considered first as the debit rules for pooling apply in this situation as well since the transaction is treated as a sale of tax.
The tax must also be paid back and transferred to IRD within 75 days after the terminal tax date for that tax period.
Nonetheless, it's something else to think about if a taxpayer requires cash in the wake of COVID-19.
Summary
The above are some things of which to be aware when it comes to the tax loss carry-back scheme.
For business owners, this IS NOT tax advice. We recommend you speak with a tax specialist in the first instance about your particular situation. The legislation is quite complex.
You can find one of our premium accounting partners here.
Small Business Cashflow Loan Scheme: Do your homework first
A former economist at one of New Zealand’s largest banks has a warning for someone considering the Small Business Cashflow Loan Scheme: It could limit your future borrowing capacity.
That’s because banks may decline lending to anyone who has this type of debt on their books, as IRD may have first collection rights as a creditor if the applicant's business goes belly-up.
An overview of the scheme
Under the Small Business Cashflow Loan Scheme, the Government is offering interest-free loans of up to $100,000 to cover operating costs such as rent, insurance, utilities and supplier payments to those with 50 or fewer fulltime staff.
IRD will administer the loans. New section 7AA Tax Administration Act 1994 gives them the power to do so.
To be eligible, an applicant must show they have suffered a 30 percent reduction in revenue (à la the wage subsidy) and prove their business is viable.
The scheme will provide $10,000 to every business, plus $1800 for every fulltime employee.
For instance, a sole trader can borrow up to $11,800.
A company with 50 fulltime employees will get the full $100,000. That comprises the base loan of $10,000 and $90,000 for its staff.
The loan will be for a maximum of five years, with repayments not due in the first two years.
If a business pays the loan within the first year, no interest will apply. An interest rate of three percent applies otherwise from the start date of the loan.
Those utilising the scheme will enter a legally binding arrangement with IRD. You can find the terms and conditions of the contract here.
As at 9am on 22 May 2020, $824.516 million worth of loans had been approved and distributed to 47,664 applicants.
The scheme is available until 12 June 2020.
The implications of an IRD loan
Ex-BNZ economist Tony Alexander, speaking as part of TMNZ’s first virtual roadshow earlier this month, was asked his thoughts on the Small Business Cashflow Loan Scheme.
He says it’s important to remember it is not free money.
Anyone borrowing money from IRD should do so only to cover uncertain cashflow fluctuations over the next 12 months.
However, he has a warning for those looking to use the scheme. That is: What will your bank say the next time you approach them for core financing?
“If you do borrow [from IRD], and then you go to your bank and say you want to borrow money, they’re going to be factoring in that new debt which you have got there, debt which I’m guessing will rank higher when it comes to closing down the firm if necessary than lending to the bank,” says Alexander.
“I figured that’s why [the Government] did it through the IRD because they would have first call on the company in a closed down situation in advance of the bank, but I can’t be sure of that.”
Does IRD have priority?
Interestingly, IRD has amended the definition of ‘tax’ in various sections of the Tax Administration Act 1994 to include these loans. So yes, that gives them the necessary collection powers.
However, what is not certain is if these loans are a priority debt that move to near the front of the queue in the way that PAYE does when a business enters into liquidation.
We’re hoping Richard Owen, who is the small and medium enterprises customer segment lead at IRD, can clarify this at our next virtual roadshow on 17 June.
You can register for this event here.
Other things to note about Small Business Cashflow Loan Scheme
Below are the important terms and conditions of the scheme to note.
IRD calls the shots
IRD can change the terms of the loan contract with 30 days’ notice. It can also assign the loan to another party.
And they can audit your application at any time.
Beware the consequences of defaulting
In the case of an ‘event of default’, then the interest rate jumps to 10 percent.
This comprises the three percent someone normally faces under the scheme, plus IRD’s underpayment interest rate. The latter is currently seven percent.
At a time where the Government has stamped out loansharking, 10 percent interest is quite draconian.
An event of default can include someone:
- Breaching or not complying with any undertaking they are required to under the agreement they have with IRD.
- Failing to make payments of the loan due to the dissolution, termination, disestablishment, de-registration or winding up of a company.
- Failing to make payments of the loan due to the appointment of a liquidator, statutory manager, administrator, receiver, bankruptcy official or similar officer in respect to a person or any of their assets.
- Ceasing to carry on the business or organisation for which the loan amount was provided.
- Making any statement or providing information that is untrue, inaccurate or misleading.
See clause 9.1 of the terms and conditions document for more information about an event of default.
You will enter a payment plan after 24 months
Anyone who fails to pay their loan back within two years will put on an IRD payment plan.
From the date of the 24th month to the final repayment date (i.e. the date falling five years after the loan is made available to someone), a taxpayer must make regular instalment payments of principal and interest, as notified by the department.
Any such instalment payments will be calculated by IRD to spread the amount of the required repayments over this repayment period.
Failing to pay an instalment amount will trigger default interest.
You must remain in New Zealand
An individual borrowing money from IRD as part of the Small Business Cashflow Loan Scheme has a requirement to stay in New Zealand (other than for temporary absences like holidays) until they pay back their loan.
You must notify IRD of any changes
Anyone using the Small Business Cashflow Loan Scheme has an obligation to tell IRD if their company or organisation ceases to exist as soon as possible.
It is important you consider this if you are in self-employment.
After all, if you choose to put your business on hold and move back into an employment role, it may trigger a requirement to repay the loan.
IRD can share your information
The contract terms give IRD broad powers to share personal information with other government departments as well as debt collectors and credit agencies.
Do your homework first
We encourage anyone thinking about using the Small Business Cashflow Loan Scheme to read the terms and conditions, so they know exactly what they’re getting themselves into.
Moreover, take heed of Alexander’s warning about the impact it may have on getting a bank loan later.
However, above all else, seek expert advice about your situation before signing up to anything.
IRD system issues affecting tax pooling
IRD is working to resolve the problem of its system incorrectly sending grace period letters to taxpayers flagged as using tax pooling.
However, they have fixed the issue which was seeing someone's GST refund being automatically applied to their provisional tax.
Here's what you need to know about both problems.
Plus, we also highlight some other system bugs impacting provisional taxpayers.
Grace period letters
Some taxpayers marked as using tax pooling to pay their income tax were receiving a letter notifying them that:
- They didn't make a payment on time; and
- IRD was giving them a grace period to pay before imposing late payment penalties.
This should not be happening.
We understand the cause of this issue is due to IRD's developers not fixing this problem as expected last year. They got diverted to other tasks before the change on which they were working made it through the test cycle and into production.
They are currently working to correct the accounts of those who have been impacted. This includes reversing the application of the grace period.
IRD will provide an update once it resolves the issue.
In the meantime, anyone who is using tax pooling can ignore any grace period letter they receive.
GST refunds applied to income tax
Despite someone being flagged in the system as having a tax pooling arrangement in place to pay their provisional tax, IRD was still applying their GST refund against their income tax.
Again, this should not be happening.
We understand the cause of this issue was IRD's system automatically ignoring the tax pooling indicator on someone's account.
That was part of a wider issue relating to GST refunds offset against provisional tax.
However, the problem has now been fixed and this will no longer happen.
That said, anyone whose GST refund was transferred to provisional tax prior to this fix will need to contact the department. They can do this by sending a message in myIR.
IRD will then reverse the transfer or refund any excess credits (where appropriate).
In case you missed it…
Below are the other system glitches impacting provisional taxpayers.
These updates from IRD are as at 16 April 2020. However, as far as we can tell, these are still ongoing issues.
Incorrect instalment dates
There is a problem causing some six-monthly GST filers to have three provisional tax instalments instead of two.
As a result, some taxpayers may have had interest (UOMI) charged incorrectly.
IRD is working on fixing this issue. It will provide an update once it finds a solution.
Incorrect UOMI and penalties on weekend due dates
There may be cases where late payment penalties and UOMI have been incorrectly charged if a provisional tax payment date fell on a weekend.
Again, the department is in the process of fixing this issue.
TMNZ will continue to keep you abreast of any IRD issue or update that pertains to tax pooling or provisional tax.
IRD adjusts UOMI rates
Someone will now pay the taxman less interest (UOMI) if they underpay their tax – but literally receive nowt if they overpay.
That’s the key takeaway after IRD announced it is adjusting its UOMI rates today.
They are lowering the interest they charge for underpaid tax from 8.35 percent to seven percent.
IRD’s credit interest also falls from 0.81 percent to zero percent.
That’s right – someone will get no financial compensation if they pay too much tax now.
IRD's new rates are effective from 8 May 2020.
How IRD sets its UOMI rates
The department calculates its underpayment interest by taking the floating first mortgage new customer rate and adding 250 basis points.
A recent legislative amendment means their credit UOMI rate is now based on the higher of:
- The 90-day bank bill, minus 100 basis points; or
- 0 percent.
Previously, they used just the 90-day bank bill, minus 100 basis points to set this rate.
Without the legislative amendment, taxpayers would have faced the awkward situation of having to pay interest to IRD if they overpaid their tax given the Reserve Bank of New Zealand's 90-day bank bill sits at just 0.26 percent.