Bright-line test: Don’t get caught by ‘change-of-use’ rule fishhook
Anyone who lives away from their main home for more than a year will be liable to pay income tax on any profit they make from the sale of a residential property sold within the new bright-line period.
That’s because of the introduction of a ‘change-of-use’ rule that came into effect when the Government amended the legislation earlier this year, in its bid to cool rampant property prices in New Zealand.
For salary and wage earners who are renovating their house, away on secondment, or looking to build a property, a hefty and unpleasant tax bill may be lying in wait as a result of this fishhook.
Detailed explanation
Under the bright-line test, an exemption applies if the property a person is selling is their main home.
Prior to 27 March 2021, a property was considered a main home if the owner had lived in it or used it as a main home for at least 50 percent of the time that they owned it.
However, under the new bright-line rules – which apply to a residential property that someone purchases on or after 27 March 2021 and sells within 10 years – homeowners can only be away from their main home for a continuous period of up to 365 days.
Homeowners must treat the days they are away from their main home as ‘non-main home days’.
If someone is away for more than 12 months and then later sells their house within 10 years of acquiring it, the main home exemption will not apply.
This is the 'change-of-use' rule.
It means a person will have to pay income tax on the profit they make from that sale for the period they were not using the property as their main home.
Example
A homeowner sells a property six years after the start of the 10-year bright-line period.
During that six-year bright-line period, they had moved out and rented this house for 15 months while they lived and worked in another part of New Zealand.
Any profit will be split between the 15 months and remaining 57 months during the bright-line period. The homeowner is liable to pay tax on the amount of profit apportioned to the 15-month period.
The impact for salary and wage earners
This has potential – and unpleasant – tax ramifications for salary and wage earners who:
- Renovate their home.
- Live away from their main home due to being on secondment.
- Purchase a section with the intention of building a property, especially if it is going to take more than a year after buying the section to move into their newly built house.
The income a salary and wage earner receives from selling a property is added to their other income sources for that year.
For most, given the eye-watering sums some houses are currently fetching on the market, this will force them into the top tax bracket of 39 percent for that year. The top tax bracket applies to those earning income above $180,000.
There are potential provisional tax ramifications, too.
If the income tax liability from the sale of a property is $60,000 or more, a salary and wage earner will need to pay this by 7 May to avoid incurring Inland Revenue (IR) interest – even if there was no obligation for this person to pay provisional tax during the income year they sell the property.
This is because they fall outside the safe harbour provision.
They can, however, use an IR-approved tax pooling provider such as TMNZ to reduce this interest cost by a notable amount. The savings can be significant.
They will also enter the provisional tax regime during the following income year due to the previous year's income tax liability being greater than $5000.
Anyone who expects to be away from their home for more than 12 months will need to keep accurate records of the number of days they live away from the property as well as any deductible expenses they wish to claim against the property's sale proceeds.
Seek advice
The rules around the taxation of property are complex.
As always, we recommend you speak to an accountant if you have any questions or wish to err on the side of caution.
Can AIM taxpayers use tax pooling?
A taxpayer cannot use tax pooling to defer payment of, or settle, provisional tax instalments calculated under the accounting income method (AIM).
However, TMNZ can help AIM taxpayers with terminal tax or when they receive a notice of reassessment.
What does tax pooling legislation say about AIM?
Legislation in the Income Tax Act 2007 clearly states that a taxpayer can use tax pooling funds to satisfy “a provisional tax liability other than under the AIM method”.
Please refer to sections RP17-RP21 of the Act for further information.
Why IR doesn’t allow tax pooling to assist with AIM payments?
Inland Revenue (IR) says tax pooling manages taxpayers’ uncertainty around provisional tax payments and their exposure to interest.
Consistent with this objective, tax pooling is not currently available for tax types where someone has certainty of their liability at the time of payment (for example, GST).
Given the payments made under AIM are calculated on actual accounting profit, taxpayers will have certainty about what's due.
As such, it's IR’s view that it's not appropriate to allow tax pooling for provisional tax payments calculated under AIM.
What does that mean for you?
IR will reject the use of any tax pooling funds to satisfy an underpaid AIM instalment. As a result, late payment penalties and interest will continue to show on a taxpayer account.
They will, however, accept the use of tax pooling funds to settle a terminal tax liability. The same applies if an AIM taxpayer has additional tax to pay after receiving a notice of reassessment.
Please be mindful of these facts when entering arrangements with TMNZ.
It’s also an important consideration before electing to use AIM to calculate provisional tax.
That's because paying tax when income is earned is not necessarily the same as when cash is received.
If someone is unable to pay an AIM instalment on time or in full due to cashflow constraints, the safety net of tax pooling will not be available to reduce their exposure to interest and eliminate late payment penalties.
Feel welcome to contact us if you have any questions.
Make IR interest, late payment penalties disappear
A missed or underpaid provisional tax payment often means a taxpayer is faced with a steep interest cost and potentially late payment penalties on top of what they owe.
However, tax pooling can make that go away.
A big frustration with Inland Revenue (IR) is that it expects taxpayers to pay the correct amount of tax on the dates it sets. No ifs, no buts.
Fail to adhere to this rigid timetable or underpay and you will face the consequences.
IR charges interest – 9.89% as at 8 May 2025 – from the date the payment was due until you pay the outstanding amount.
Late payment penalties may also apply as follows:
- One percent the day after payment was due.
- An additional four percent if the tax amount (including late payment penalties) remains unpaid after seven days.
A tax pooling provider such as TMNZ operates with the blessing of IR. It can be of assistance if taxpayers find themselves in this situation.
Where might this be useful?
In the event you missed your recent 7 May provisional tax payment – or any other instalment relating to the 2020-21 income year, for that matter – we can eliminate any late payment penalties for which you may be liable and significantly reduce the interest you pay.
You make your payment to TMNZ and we apply backdated tax that was paid to IR on the original date(s) it was due against your liability.
The taxman treats it as if you paid on time once it processes this transaction.
This wipes any IR interest and late payment penalties showing on your account.
You have the option of making to TMNZ a one-off payment at a date of your choosing or making regular instalment payments towards your liability over a longer period.
TMNZ gives you up to 13 months to pay your 7 May provisional tax for the 2020-21 income year.
Is your 2020 terminal tax overdue?
You still have time to use TMNZ to reduce the interest cost and eliminate late payment penalties if you have outstanding provisional or terminal tax liabilities for the 2019-20 income year.
However, you will have to act quickly.
Tax pooling legislation gives taxpayers an additional 75 days past their terminal tax date to pay their terminal tax.
If your terminal tax for the 2019-20 income year was due on 7 April 2021, you would have until 15 June to settle owe with TMNZ.
Reassessed by IR
TMNZ can also assist with historic income tax payments and other tax types such as GST and PAYE if you receive a notice of reassessment from IR.
You have 60 days from the date the IR issues this notice to use tax pooling.
Please contact us if you have any questions.
Working capital solution amid timber shortage
For builders wanting to ensure they have enough materials to complete the jobs they have scheduled over the coming months amid the current timber shortage, there’s a source of funding available to them that they may have overlooked if they require working capital.
It’s their provisional tax payments.
And a service called tax pooling – which is offered by an approved commercial provider such as TMNZ – provides a way for them to use the money set aside for Inland Revenue (IR) for more pressing needs.
It lets them pay their tax when it suits them, without facing any consequences from the taxman.
We can’t see the wood for the trees
The supply of wood to meet New Zealand’s domestic demand is under pressure.
Estimates suggest there is a five to 10 percent shortfall in supply. Various factors have contributed to the shortage.
However, the abrupt announcement by Carter Holt Harvey – one of New Zealand’s largest processors, manufacturers and suppliers – to cut structural timber supplies to some merchants has caused further panic, as it has come at a time when the building industry is frantically busy.
Indeed, planning ahead and shoring up supply in the short term have become even more important.
There are reports that some builders with working capital available to them have been wisely stockpiling timber in warehouses since last November.
Provisional tax is a source of working capital
However, what happens if someone wants to follow their lead yet does not have, or cannot access, the funds to pay for the supplies they need?
Well, here’s the thing – they do have working capital available to them. They just might not realise it because, at first glance, it seems such an unlikely source.
On 7 May, IR is expecting many builders with a 31 March balance date to pay their final instalment of provisional tax for the 2020-21 income year.
Most would never dare not to pay the taxman on time, for they will run the risk of incurring steep interest and late payment penalties. The latter are charged as follows:
- One percent the day after the tax amount was due.
- An additional four percent if the tax amount (including late payment penalties) remains unpaid after seven days.
However, given the uncertainty of the current timber shortage, is handing provisional tax over to IR the most productive use of those funds? If there was some way to hold off making this payment, would it not make better business sense to use the money set aside for tax to plan ahead to ensure there are enough materials on hand to keep you going and your customers happy?
After all, having a limited supply of timber in reserve makes it difficult to complete jobs on time (or at all). You don’t want to be caught short – especially if you have plenty of work in the pipeline and know you will have the money to pay the taxman later.
Defer 7 May provisional tax – pay when it suits you, without the consequences
Tax pooling offers a solution.
For an upfront fee, you can free up cashflow by financing your 7 May provisional tax payment for up to 13 months with TMNZ.
You don’t have to worry about incurring IR interest and late payment penalties under this arrangement. Approval is guaranteed and no security is required.
Ahead of 7 May, you would pay TMNZ an upfront finance fee and TMNZ would make a date-stamped tax deposit into IR account on your behalf.
The upfront finance fee is based on the tax amount required and the date in the future you wish to pay. You have the option to defer this payment up until mid-June next year.
At the agreed upon date in the future, you would pay TMNZ the core tax amount.
TMNZ would then arrange for the date-stamped tax deposit it made into its IR account on 7 May to be transferred to your IR account.
IR would treat it as if you paid on time once it processes this transaction. This wipes any IR interest and late payment penalties showing on your account.
Get in touch if you have any questions. We're happy to help.
Commissioner’s discretion for tax pooling
A provision within legislation allows taxpayers to use tax pooling for certain income tax or RWT voluntary disclosures where no return has been previously filed.
This is known as Commissioner’s discretion.
And it’s worth seeking if a taxpayer satisfies all relevant criteria (see below), as settling these underpaid tax types through an approved tax pooling provider such as TMNZ can result in notable interest savings. The interest we charge can be significantly lower than Inland Revenue (IR).
To use tax pooling for historical income tax and other tax types, there generally needs to be a notice of reassessment issued by IR.
However, section RP17B (9) Income Tax Act 2007 stipulates that the Commissioner’s discretion found in RP17B (10) of the Act may be available in situations where a voluntary disclosure for income tax or RWT is made and a return for that tax type has not previously been filed.
The criteria for Commissioner’s discretion
That said, there are three conditions a taxpayer seeking Commissioner’s discretion to use tax pooling funds to settle income tax and RWT obligations must meet.
They are as follows:
- The increased amount arises as a result of an event or circumstance beyond the person’s control; and
- The person has a reasonable justification or excuse for not filing the return by the required date; and
- The person has an otherwise good compliance history for two income years before the income year in which the voluntary disclosure is made.
A taxpayer must satisfy all three requirements for the Commissioner to exercise their discretion.
This ensures that in exercising discretion she is satisfied that each occasion of non-compliance is not a deliberate act or a continuation of failures because of the taxpayer’s inadequate or poorly applied internal controls.
We recommend you refer to the examples 12 and 13 (pages 44 and 45) of the Tax Information Bulletin Vol 23, No 8, October 2011 to get a sense of the scenarios where IR will allow or decline a request for Commissioner’s discretion.
Applying for Commissioner’s discretion
The process is straightforward.
An application asking the Commissioner to exercise their discretion to use tax pooling funds can be made in writing.
Be sure to include the taxpayer’s name and IR number in this correspondence.
Outline the details of the case in a few paragraphs. We recommend splitting this information under the following headings:
- Background information. Include information about the taxpayer and nature of their business. It should also contain contextual information that you deem relevant, such as historical business relationships, personal circumstances, and relationships with other/historical accountants.
- The increased amount arises as a result of an event or circumstance beyond the person's control. Include detailed (and chronological) events or factors that have occurred throughout the period in question that provide further contextual explanation as to how the liability has arisen and not been declared until now, and how this was beyond the taxpayer’s control.
- The person has a reasonable justification or excuse for not filing the return by the required date. Include any details that show the client has not been purposefully negligent.
- The person has an otherwise good compliance history for two income years before the income year in which the voluntary disclosure is made. Include details that support a good prior history. It’s important to show this occurrence is out of the ordinary and therefore worthy of consideration.
TMNZ has an email template available should you require this.
Requests asking the Commissioner to exercise their discretion can be sent to taxpooling@ird.govt.nz
TMNZ is here to help
If you’d like further information on Commissioner’s discretion or wish to discuss a particular scenario, please get in touch.
Taxing times: Are you facing a cashflow crisis in April and May?
Tax represents cash and for all businesses, cash is king – especially in April and May.
After all, Inland Revenue (IR) is expecting two tax payments over these months.
The first is due tomorrow (7 April). That’s called terminal tax. If you did not pay enough tax during the 2019-20 income year, you will be liable to pay the remaining balance to settle your liability for the year by this date.
A month later, businesses with a 31 March balance date will pay their final instalment of provisional tax for the 2020-21 income year.
Both have the potential to cripple cashflow in April and May if not dealt with accordingly.
That’s why it’s important to have a plan and know your options.
What to do and things to know
Pay the terminal tax first. It is the oldest debt, and you will have IR’s debt collection team hot on your tail if you don’t.
In terms of the provisional tax due on 7 May, you will need to figure out what to pay.
What do you expect your yearly profit was? Did you pay sufficient provisional tax over the year? Those are questions you will need to ask yourself given this payment falls due after your income year has ended.
A safe harbour from IR interest applies to taxpayers who expect to have an income tax liability of less than $60,000 and pay all instalments of provisional tax during the 2020-21 income year on time and full using the standard uplift method. Standard uplift is the default method if you did not choose to use another calculation option.
This means no IR interest is payable on underpayments (or received on overpayments) until after the taxpayer’s terminal tax date. For the 2020-21 income year, this will be 7 April next year.
Many smaller taxpayers will benefit from using the safe harbour provision.
However, if you expect your income tax liability for the 2020-21 income year is going to be $60,000 or more – and you have paid all provisional tax instalments prior to 7 May on time and in full using the standard uplift method – you will need to pay the final balance to settle what you owe for the year to avoid incurring IR interest from 7 May on any shortfall.
How we can assist with terminal and provisional tax
Tax Management NZ (TMNZ) can help you manage your terminal and provisional tax payments.
Terminal tax
If you notice IR interest showing on your account in relation to the terminal tax due on 7 April, we offer a way to reduce this cost.
As an IR-approved tax pooling provider, we can apply backdated tax paid to IR on the date it was originally due against your 2019-20 income tax liability.
You make a payment directly to TMNZ comprising the core tax amount plus our interest. We then arrange for the tax you require to be transferred to your IR account.
The interest you pay TMNZ is significantly cheaper than what IR charges for underpaid tax.
Once IR processes this transaction, it will treat it as if you paid on time. This clears any IR interest and late payment penalties showing on your account.
You have up to 75 days past your terminal tax date to settle your 2019-20 income tax obligations with TMNZ.
Provisional tax – defer payment until June 2022
TMNZ can also assist with 7 May provisional tax if cashflow is a problem.
In the event you cannot or do not wish to pay on this date, you can enter an arrangement with us to pay your tax at a time that suits your business, without having to worry about late payment penalties. You would have up to 13 months to pay your 7 May provisional tax payment with TMNZ.
TMNZ makes a date-stamped deposit into its IR account on your behalf on 7 May and you pay us later.
You have the option of paying the full amount at a future date of your choosing or paying what you owe in instalments. TMNZ transfers the date-stamped tax deposit from its IR account to your IR account as and when we receive your payment(s).
The tax department treats it as if you paid on 7 May once it processes this transfer, eliminating late payment penalties.
Again, our interest cost is much cheaper than what IR charges for missed or underpaid tax.
Please get in touch if you have any questions about tax pooling. We’re happy to help.
Partnership with ATAINZ
March 29, 2021 — TMNZ today announces a partnership with The Accountants and Tax Agents Institute of New Zealand (ATAINZ). The partnership will advance TMNZ's ambition to accelerate the adoption of tax pooling solutions amongst taxpayers who would benefit from genuine provisional tax flexibility. In addition, TMNZ is announcing plans to commence offers and opportunities via the ATAINZ membership.
ATAINZ members will be able to look forward to the collaboration between TMNZ and ATAINZ. Starting from Q2 2021, ATAINZ members will have available tax pooling training, collateral options, and an ATAINZ point of contact at TMNZ.
Richard Abel, Chairperson of ATAINZ said: “Having been a user and supporter of tax pooling through TMNZ for a number of years, we’re excited to formalise an agreement with TMNZ for all our members. Signing the partnership with TMNZ affirms our commitment to being recognised as the voice of small-medium businesses (SME) in New Zealand. Tax pooling presents a cashflow solution that more should be aware of.”
Neil Bhattacharya, Head of Client Services at TMNZ said: “ATAINZ is a progressive organisation that is growing quickly and TMNZ is looking forward to partnering with them for the next 3 years and beyond. We feel strongly that tax pooling is a key cashflow tool for SMEs and a perfect match for ATAINZ clients looking for cashflow options.”
About ATAINZ
The Accountants and Tax Agents Institute of New Zealand (ATAINZ) exists to promote the welfare and professional development of its members and to represent members' interests in New Zealand. It is unique in the New Zealand tax and accounting market because of its grassroots contact with members.
Terminal tax isn’t due until 7 April – so why's IR already charging interest?
Just because a terminal tax amount for the 2019-20 income year is not due and payable until 7 April does not mean Inland Revenue (IR) is not already charging interest.
Why is this happening, you may be asking?
There could be several reasons. The method used to calculate your provisional tax payments, your income tax liability for the year, or whether you underpaid or failed to pay an instalment on time and in full can all be factors.
However, to understand why that might be happening, one needs to understand the different interest rules that apply for provisional taxpayers.
Below we explain how they work for those who used the standard uplift or estimation methods to calculate their payments during the 2019-20 income year.
We also cover the somewhat unfair rules that apply for new provisional taxpayers in their first year of trading because these often catch people out.
Standard uplift method
Please refer to the table below.
| If your income tax liability for the year is… | And you paid… | Then… |
| Less than $60,000 | All uplift instalments on time and in full or had no obligation to pay provisional tax for the year. | IR interest should only apply from your terminal tax date if you fail to pay by then the final balance required to satisfy your liability for the 2019-20 income year. |
| $60,000 or more | The uplift instalments on time and in full at all instalment dates prior to the last one.
Any final balance remaining to settle what is owed for the year at the date of the final instalment. |
IR interest should only apply from the date of your final instalment if you fail to pay by then the remaining balance to satisfy your liability for the 2019-20 income year. |
But what happens if you did not pay an uplift instalment on time or in full?
In this situation, the following rules will apply.
When provisional tax is underpaid or paid late at an instalment date prior to the final one for the 2019-20 income year, IR will charge interest on the lesser of:
- The uplift payment due, minus any amount paid in relation to that instalment; or
- The actual income tax liability for the year divided by the number of instalment dates for the year, minus any amount paid in relation to that instalment.
At the date of the final instalment, IR will also charge interest on the remaining balance owing to settle your liability for the year.
Estimation method
For those who used or switched to the estimation method at any time during their 2019-20 income year, IR may be charging interest as far back as the date of the first provisional tax instalment if you did not pay enough tax to satisfy your actual liability.
Interest will be charged based on the following: The income tax liability for the year divided by the number of instalments payable for the year, minus any amount paid in relation to that instalment.
New provisional taxpayers
A different set of rules apply to those in their first year of trading whose income tax liability is $60,000 or more.
That’s because they will be deemed to be a new provisional taxpayer.
A taxpayer must meet certain criteria to be considered a new provisional taxpayer. This criteria differs for individuals and companies/trusts.
For the 2019-20 income year, an individual is a new provisional taxpayer if they satisfy ALL of the below:
- Their income tax liability for the year is $60,000 or more.
- Their income tax liability in each of the four previous tax years was $2500* or less; and
- They stopped receiving income from employment and started to receive income from a taxable activity during that tax year.
A Company/trust is a new provisional taxpayer in the 2019-20 income year if they satisfy ALL of the below:
- Their income tax liability for that tax year is $60,000 or more; and
- They did not receive taxable income from a taxable activity in any of the four previous years.
How many interest instalments
IR will charge interest based on the number of instalments you could have paid if you are a new provisional taxpayer.
The number of instalments you could have paid is based on the date you started your taxable activity.
For those with a 31 March balance, please refer to the table below.
| If your first year of trading starts… | Then the number of provisional tax instalments payable is… |
| Before 29 July | Three (28 August, 15 January and 7 May) |
| On/after 29 July but before 16 December | Two (15 January and 7 May) |
| On 16 December or any time after that | One (7 May) |
These dates will differ if your balance date is not 31 March or you file GST returns on a six-monthly basis.
Interest will be charged based on the following: The income tax liability for the year divided by the number of instalments payable for the year, minus any amount paid in relation to that instalment.
*For the 2020-21 income year onward, the threshold was increased to $5000.
How TMNZ can help
If there is IR interest showing on your account, there's a way to reduce this cost significantly.
As an IR-approved tax pooling provider, TMNZ can apply tax paid to IR on the original due date against your liability if you have missed or underpaid your provisional tax for the 2019-20 income year.
This wipes any IR interest and late payment penalties showing on your account.
How it works
You pay the core tax plus TMNZ’s interest to us rather than paying IR directly.
Once we receive your payment, we transfer the date-stamped tax amount you require from our account at IR to your IR account.
As the tax carries a date stamp, IR treats it as if you have paid on time once it processes this tax pooling transaction. This eliminates any late payment penalties incurred.
TMNZ’s interest cost can be significantly cheaper than the interest IR charges if you underpay your tax. As of 8 May 2020, IR debit interest is currently seven percent.
You have up to 75 days past your terminal tax date for that tax year to pay the additional provisional or terminal tax you owe via TMNZ.
That means if you have a 7 April 2021 terminal tax date, you have until mid-June to settle your income tax for the 2019-20 income year.
Please contact us if you have any questions about tax pooling.
IR payment allocation rules explained
Provisional tax payments made on or before the date of the final instalment for the year are applied to the oldest overdue tax amount first while payments made after the date of the final instalment are applied to the interest owing on any overdue tax first, then the overdue tax amount.
The Inland Revenue (IR) payment allocation rules – which are found in s120F and s120L Tax Administration Act 1994 – also apply to payments made via a tax pooling provider such as TMNZ.
It’s important to understand how they work and differ from one another.
Detailed explanation
Section 120L covers provisional tax payments made on or before the date of the final instalment for the year.
It requires IR to apply a payment to unpaid tax in order from oldest to newest. Please note the unpaid tax amount(s) include late payment penalties.
Section 120F deals with payments that are made after the date of the final provisional tax instalment for the year.
It requires IR to apply payments, in the following order, towards:
- The interest accrued on the oldest unpaid tax amount until that interest is paid.
- The oldest unpaid tax amount until that tax is paid.
- The interest accrued on the next oldest unpaid tax amount until that interest is paid.
- The next oldest unpaid tax amount until that tax is paid.
- To each subsequent arising interest and unpaid tax amount using the pattern above, in time order that relevant unpaid tax arises, until they are paid.
Again, the unpaid tax amount in s120F includes late payment penalties.
The ramifications
These allocation rules mean a taxpayer may well find a tax payment they intended to be destined for a particular instalment date is allocated by IR’s system to earlier unpaid amounts first.
For example, let's say they may make a $10,000 payment on time and in full on 15 January 2021. However, if they failed to pay their 28 August 2020 (P1) provisional tax, then their $10,000 payment will be applied as per s120L to the overdue tax amount (including late payment penalties) at P1 first.
As such, this leaves them exposed to additional (and unexpected) late payment penalties and interest.
It does not matter if the $10,000 payment they made on 15 January 2021 is a date-stamped transfer from the account of a tax pooling provider. Please see sRP19 (1B) Income Tax Act 2007.
In other words, you need to clear the tax liability at all earlier instalment dates first.
How TMNZ can assist with missed provisional tax payments
It's best to purchase from TMNZ the backdated tax to cover the shortfall at the earlier instalment date.
This achieves two things.
Firstly, it eliminates late payment penalties and significantly reduces the interest cost on the underpaid tax.
That’s because the tax you are purchasing from TMNZ was paid to IR on the date it was originally due. IR will treat it as if you have paid on time once it processes your transaction with TMNZ.
Secondly, it ensures that any other payment that was otherwise made on time and in full will be allocated to the particular provisional tax date for which it was intended.
A taxpayer has up to 75 days past their terminal tax date for that tax year to purchase the tax they require.
For example, if you have a terminal tax date of 7 February 2021, you will have until mid-April to settle your 2020 income tax with TMNZ. Those with a 7 April 2021 terminal tax date have until mid-June.
Please contact us if you have any questions. We're happy to help.
Payment options for 15 January provisional tax
One of the challenges of paying provisional tax in times of economic uncertainty is making a payment that is both appropriate and does not negatively impact your cashflow.
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 (IR) that you could be utilising in your business. Conversely, you don’t want to underpay because you run the risk of facing IR interest 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.
It's a service that offers benefits not available to those who pay IR 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 IR-approved tax pooling provider, 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 IR 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 what IR 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. 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 IR 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 IR account against your liability.
IR will treat it as 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.