Paying provisional tax – do you want it to be easier?

Kiwi business owners are all too familiar with the concept of provisional tax, and for many, paying it can be a bit of a chore. 

One of the biggest issues people face is the IRD’s inflexibility. The IRD sets the dates you have to pay, and you’ve got no choice but to follow their lead.  

No consideration is given to the time of year, business cashflow, or seasonal circumstances. After all, no one wants to pay a big lump sum when cashflow is tight.  

The IRD model doesn’t consider whether businesses are light on cash, have an urgent need for money, or a better use for their funds. You simply have to pay up or face the penalties — with IRD interest on top of late payment fees. 

But there’s one thing you should know about paying provisional tax. There is a better, easier way: tax pooling.  

Tax pooling gives you more choice over your tax and lets you make payments on your terms without incurring the IRD’s wrath. 

The option has been available to New Zealand provisional taxpayers for more than two decades.  

Since 2003, thousands of businesses have been paying provisional tax through tax pooling providers like TMNZ. We let you pay what you owe at a time that suits you.  

The best part? Tax pools are IRD-approved.

So, how does a tax pool work for paying provisional tax? 

A tax pool is all about balance. Some businesses in our pool may end up overpaying their liability. These overpayments help other businesses in the pool that need more time to pay. A collective approach. 

Users of our tax pool do have to pay some interest, but it’s charged at a much lower rate than the IRD’s interest or the rates you’d pay for taking out an overdraft with the bank. There are also no late payment penalties to think about.  

All you have to do is tell us the tax amount due and when and how you’d like to pay. We’ll take care of the rest and notify the IRD. 

Why haven’t I heard about this before? 

While tax pooling isn’t common knowledge among small businesses, it is considered best practice among many accountants and tax advisers.  

How can I start paying provisional tax with tax pooling? 

Discuss tax pooling with your accountant (or with one of our Premium TMNZ Accounting Partners) ahead of your next provisional tax instalment or if you’ve struggled to match business cashflow with your past payments. 

Ask your adviser to download this free guide that provides simple information on how tax pooling works.  

Want to learn more about tax pooling? 

Talk to our customer support team on 0800 888 829 or send us an email. 


Provisional tax 101 — making things easy

Provisional tax breaks up the income tax you pay Inland Revenue (IR). It is paid in multiple instalments instead of one large sum at the end of the year.

You may have to pay provisional tax if you earn income where tax hasn't been deducted before you receive it. When your residual income tax (RIT) for the previous year was more than $5000, you will have provisional tax to pay. Residual income tax is the amount of unpaid income tax for the year minus any tax credits such as PAYE that you are entitled to.

Generally, you will pay provisional tax three times a year. For example, if you have a 31 March balance date (your end of financial year). In that case, your three provisional tax instalments are usually due on 28 August, 15 January, and 7 May. These dates can change by a few days to avoid public holidays and weekends. They can also differ according to how you have calculated your RIT, so it's best to check in with your accountant or myIR to confirm your payment dates. 

What if you miss your provisional tax payment?

When you file your income tax return and calculate your RIT for the year, you deduct the provisional tax you paid earlier. If you have paid more provisional tax than you owe, you will receive a refund from IR.

However, suppose you have underpaid your income tax for the year. In that case, you must pay the remaining balance or risk late payment penalties (LPP) and interest accruing on what you owe. IR interest is calculated daily on any outstanding amount that you owe. You can check the current interest rate here.

Don’t worry though, TMNZ can help. Read about our flexible ways of paying tax below.

Late payment penalties and interest

Penalties and interest on missed or underpaid tax may be charged as follows:

  • one percent the day after the payment was due.
  • an additional four percent if the tax amount (including LPP and accrued UOMI) remains unpaid after seven days.
  • UOMI may be charged from the day after the payment was due - UOMI will be charged daily until you have paid your total tax amount, including late payment penalties and any accrued interest.

Special IR interest rules under the Safe Harbour Provision

If you have used the standard uplift method to calculate your provisional tax:

  • and your RIT for the year is less than $60,000
  • and you pay all required provisional tax instalments on time and in full

Then you don't have to worry about incurring IR interest if the tax you have paid during the year is less than your actual RIT total. This is because you fall under what's known as the Safe Harbour Provision. Any final balance to settle your tax bill will be due by your terminal tax date. IR interest will only apply from your terminal tax date if you don't pay your balance by then.

The rules work slightly differently if the actual RIT is $60,000 or more.

In that situation, if you have paid all your instalments on time and in full, you will incur IR interest on the remaining balance until you have paid in full. IR interest is calculated from your final instalment date for that year. 

Flexible ways to pay your provisional tax

With an IR-approved tax pooling provider, like TMNZ, you can smooth out your tax payments up to 75 days after your terminal tax date, so you have up to 22 months longer to pay your tax bill.

With TMNZ Flexitax, you can pay in small regular payments or lump sums when it suits you. There is no up-front payment, and as long as you settle your arrangement by the date TMNZ provides, your IR account will show as paid on time. It's called ‘Flexitax’ for one very important reason. It's flexible. Meaning you can make tax payments on your terms. Regularly or in lump sums. On top of that, you'll never have to worry about LPP or high interest rates again (ours are extremely competitive). And of course, it's all tax deductable.

If you know when you'll have the funds to pay your tax, you can also choose a date in the future using Tax Finance. With Tax Finance, you can look ahead and match your tax payments to seasonal highs. Meaning you can avoid things that have the power to set you and your business back – like bank overdrafts and loans. 

With Tax Finance, you choose a date or dates in the future when you know you can pay your tax. You'll lock in a competitive interest rate that you pay upfront. You can rest easy knowing that as long as you settle the arrangement by the date TMNZ provides, your tax will show as paid on time with IR. No late payment penalties, and you will have saved considerably on interest.

Better for your cashflow, better for your business.

What if I've missed my provisional tax payment?

TMNZ can help to wipe late payment penalties and reduce your interest cost if you have underpaid or missed your provisional tax. Contact your accountant or tax agent and let them know you want to pay your missed or underpaid provisional tax using TMNZ tax pooling. Or get in touch to see how we can help.

As always, we recommend you speak to your accountant with any questions.

 

Information correct as at 01/03/2023 


Image: Bart Taylor

Syncing provisional tax to cashflow

As a self-employed painter and decorator, Bart Taylor knows full well how business owners can get themselves into strife if they don’t plan for their tax obligations.

He speaks from his own personal experience.

That’s why Bart is happy to talk about how Tax Management NZ (TMNZ) enables him as a self-employed tradesperson to take the stress out of having to pay provisional tax on dates dictated by Inland Revenue (IRD).

TMNZ offers Bart the flexibility to make the payments when it suits his cashflow.

As someone who doesn’t always get paid every week, that’s important because it offers his business some breathing space while he waits for the money he’s earned from completed jobs to land in his bank account and ensures that other important invoices can be paid in the meantime.

A bit about Bart

Bart owns and operates his own business in Christchurch.

He’s a one-man band and that’s the way he likes it. Plus, most of his work means he does not require a crew, although he will occasionally use contractors when required or on larger jobs.

Bart has been his own boss since 2013, when, at the age of 24, he decided to make a go of this painting lark on his own. The market in the Garden City was awash with painting gigs during the rebuild and becoming self-employed seemed like a low-risk move.

Fast-forward nearly eight years and his gamble has paid off. He is enjoying the benefits that come with self-employment and, as a husband and father in a young family, the better work-life balance he has achieved.

Tough tax lessons

Yet that’s not say that everything has been a bed of roses during that time.

“Becoming self-employed has been a bit of a rollercoaster. Lots of learnings, lots of difficult times, hard times,” says Bart.

“First and foremost, I’m a tradesman, so I am a worker. The back office, the organisation, the financial side of things is not my strong point. With the tax side of self-employment, I managed it very poorly for years because I was so young.”

Like other business owners, Bart wasn’t as prepared as he should have been and was “stung” in his second year of trading. That was when two years’ worth of tax was due. Ouch.

He admits having to pay provisional tax was “rough for a little while”.

“In the trade industry, you don’t always get paid every week and you need cashflow to run your business,” explains Bart.

“My accountant saw there was a risk of if we paid that tax bill in full, that I might fall short in other areas and he wanted to make sure that my relationship with my trade suppliers stay good and that the invoices I need to pay get paid on time, not just the IRD ones.

“He recommended Tax Management NZ and that freed up cashflow.”

Breathing space from IRD to manage cashflow

That’s because TMNZ gives Bart the flexibility to pay his provisional tax when it suits his business, without the consequences of steep IRD interest and late payment penalties.

It operates with the blessing of the taxman, too.

TMNZ makes a date-stamped payment to IRD on Bart’s behalf on the date his provisional tax is due. Bart pays TMNZ at a time when it suits his cashflow.

TMNZ transfers the date-stamped payment to Bart’s IRD account and IRD treats it as if Bart himself has paid on time. This eliminates any IRD interest and late payment penalties showing on his account.

“Sometimes the option of TMNZ, to be able to borrow some money for a short period of time, to make sure you hit that IRD deadline, frees you up with your cashflow until that payment [you are waiting on] comes through,” says Bart.

“The fee of using Tax Management NZ is so low and affordable in comparison to the failings of if you ran out of money in that time, or the scramble and the stress, so it’s definitely worth it.

“It’s changed my perception around making these tax payments. It takes the stress off of it.”

And how does dealing with TMNZ compare to dealing with IRD?

“You get a bit more of a personal touch with Tax Management NZ because you get a prompt response and it’s not a cookie-cutter [reply].”

Bart is one of many small business owners throughout New Zealand who benefits from the provisional tax flexibility TMNZ offers. Feel free to contact us for more information about our service or if you have any questions. We're happy to help. Alternatively, you can register with TMNZ here.


Image: Tax refund

Easy money for business not always the best option

Image: Easy money

Not long ago, one financial adviser was heard to lament the Kiwi habit of using the mortgage to fund the business. Others turn to bank overdrafts or their personal savings – all of which some might argue are easy choices to make but not necessarily the best.

Putting one's house on the line to help the business through a tight spot may be less risky in times when property prices are at an all-time high, and interest rates are low.

However, blurring personal and business finances can cause sleepless nights. Business is unpredictable. Interest rates will go up at some point.

Research by YouGov, commissioned by small business lending specialist Prospa, found that 69 percent of SMEs use personal finances for business purposes – including credit cards – and one in four borrows from family or friends.

Approximately 21 percent had drawn down on the mortgage.

The difficulty of securing business finance from banks in New Zealand is well documented. Even at the height of COVID-19 lockdowns, banks kept their hands in their pockets after the Government stepped up with the Business Finance Guarantee Scheme. Associate Finance Minister at the time, Shane Jones, suggested the banks were jeopardising their 'social contract'.

It would not be surprising to find that this kind of publicity, coupled with a widespread perception among SME owners that banks don't lend to small businesses, creates a general pessimism about finance that drives Kiwis to put their houses up as security, borrow from friends or swipe the credit card. Utilising personal resources is a shortcut, but easy is rarely better.

Before you borrow or mix personal and business finance, consider the options below.

Self-finance

Consider reducing your costs as a way to self-finance your business. 

Businesses incur costs, such as small but regular payments that slip beneath the radar. Work with your accountant to identify unnecessary expenses and ways to save on costs — review operational details like slow collections, bad debtors and redundant or excessive inventory.

One consequence of tight cashflow is the failure to pay taxes on time. This leads to expensive IRD interest and penalty payments. Tax pooling offered by Tax Management NZ will help save you money in the long term because you avoid interest and penalties.

Research alternatives

Tax pooling is an alternative and financially cost-effective way to meet your tax payments on time, but there are also many other ways to get business finance. 

The Government's Small Business Cashflow Loan Scheme, if you have experienced a 30 percent decline in revenue due to COVID-19), discount invoicing (you administer your sales ledger) or factoring (the factoring company administers your ledger) merit thought.

Other options may include attracting investors or turning to a second or third-tier lender who is more expensive, but you may not be required to put your house on the line.

Review payment terms

Together with your accountant, consider negotiating better terms with your debtors while also reviewing your current payment terms. Simply changing your terms to, for example, seven days with all new customers – or getting the agreement of existing customers – could make a big difference to your finances.

Ultimately it may be that mortgaging your house is your best option but get expert advice first because easier isn't necessarily better


What is a cashflow forecast, exactly?

Most people nod in agreement when they hear the fable of the ant and the grasshopper – the ant worked all summer while the grasshopper lazed about, only for a starving grasshopper to come begging at the ant's door in winter.

However, it's surprising how few business leaders apply the common-sense lessons the fable teaches.

Many could be forgiven for thinking that the fable is about the value of hard work, and it is to an extent, but it is also a story about prediction and preparation – know what's coming and prepare for it.

Your stock standard cashflow forecast is an essential tool for this purpose.

In its most basic form, a cashflow forecast is a table that 'predicts', over a specific time, a) the money the business expects to receive, and b) the money the company expects to pay out – in essence, how much money you expect to have on hand in any given period.

The benefit of a cashflow forecast is that it allows you to predict the lean times, like winter for the ant, and the good times, like summer for the grasshopper. Summer and winter are pretty straightforward, but real-life business is far more complex and needs to consider, for example, factors like seasonal variables, capital expenditure and increases in expenses like rents.

A cashflow forecast is not a sales forecast, which concerns itself with predicted sales in the coming period and sometimes errs on the side of optimism.

The cashflow forecast should include expected sales but err on the side of conservative – sales aim for the stars, the cashflow forecaster settles for the moon.

1. Determine the period

The ant and the grasshopper concerned themselves with summer and winter. Business leaders will often prepare an annual cashflow forecast, but some argue it's best to take the ant's lead and forecast for a shorter period – even six months, or at least plan to review your cashflow forecast quarterly.

2. Predict your income

Look back over the last couple of years to get a handle on averages as well as the ebb and flow of cash, accounting for seasonal fluctuations and unforeseen variables that have impacted you in the past. Some would argue that basing your cashflow forecast on past performance is looking back, not forward, which is why using your sales forecast is important. Your historical financials may help you temper the optimism of the sale forecast towards realism.

3. Add your costs and outgoings

Don't leave out the small expenses because they quickly add up. Remember that not everybody pays on time. Kiwi SMEs wait on average 24.1 days to get paid, according to Xero's Small Business Insights for December 2020. Consider the risks associated with cost increases, like telephones and other fees. Plan for the best, expect the worst.

4. Put your cashflow forecast to work

A good cashflow forecast will give you an idea of what to expect so that you can prepare now to address any issues. If, like the ant, you note that the winter months of June, July and August will be tight, take steps to prepare better or improve the situation.

In the words of Sir Richard Branson, “Never take your eyes off the cashflow forecast because it's the lifeblood of the business”.

Tax Management NZ has produced a guide called Better Cashflow Management. You can download your free copy here.


Why do some companies fail while others prosper?

Image: We are closed

“It's a funny market,” according to one business owner. “Some businesses I know are thriving, while others in the same industry are struggling just for cashflow.”

The truth is that perhaps it is less a ‘funny market’ and more symptomatic of the type of market we have here in New Zealand and, importantly, how we respond to that market.

Director of the chartered accounting firm and business advisors BetterCo in Auckland, Peter Prema, says that while media proudly refer to New Zealand as the easiest place in the world to start a business – according to the World Bank – it may be more a curse than a blessing.

“It is easy to start a business here, but perhaps it is one of the most difficult places in the world to run a business because our market is so small,” says Prema. “There are so many businesses just getting by.”

Not only is New Zealand small, but the ease with which anybody can start a business may be part of the problem because with it comes competition and sometimes a race to the bottom on price just to survive. 

A study by Stanford University, Why Do Some Companies Thrive While Others Fail?, calls it ‘density dependence’.

Researchers Michael Hannan and Glenn Carroll write in their book, The Demography of Corporations and Industries, that “organisations' vital rates — their founding rates, growth, and mortality — depend on the total number of organisations within the relevant population”. 

In biology, density dependence describes a situation in which “crowding, predators and competition curtail population growth”.

Perhaps we can look to the natural world – to survival strategies creatures adopt when there's too much competition for food, water and air – for one or two lessons about how to thrive in a country where there is too much competition and not enough customers. 

Cannibalising 

Hannan and Carroll refer to one phenomenon where businesses that are established cannibalise on the failures of companies that have gone under.

This may be taking over or buying out smaller businesses that are struggling (for their customers, intellectual property et cetera) or adopting any innovations those that failed may have brought to the market.

In some ways, it contradicts the statement that the New Zealand business environment is oversubscribed because it shows that companies need competition to learn and innovate. It also explains why some thrive, and others expire – it's the law of the jungle out there.

Competitive performance

Any ecologist will tell you that animals survive based on their performance while also relying on a bit of luck. There is a tendency by many SME owners to be head down producing the work – working in the business – instead of on the business. Those working on the business demonstrate ‘competitive performance’. They are primarily concerned with growing a company than with the nuts and bolts of what they do.

If they get enough sales, they free up cash and time to hire people to work in the business. Few do this because it is easier to get caught up in the nuts and bolts. Working in the business gives us a sense of accomplishment and certainty – although it’s a false sense of certainty – whereas working on the businesses exposes us to more unknowns and our lack of skills in some areas.

Ecological niche

In the animal world, a species will often niche to a specific environment. An ecological niche describes “how an organism or population responds to the distribution of resources and competitors and how it, in turn, alters those same factors”. In other words, animals adapt their behaviour according to the environment they are operating within. 

For businesses, this could mean adopting a specific market niche (your new environment) and changing your behaviour (marketing, fulfilment, et cetera) to meet the particular market's needs. 

Many businesses resist this because of the ‘fear of missing out’ (FOMO) – precisely because they say the local market is too small to niche.

The high number of business failures in New Zealand suggests that perhaps when you try to be ‘everything to anybody’, you end up being ‘nothing to nobody’.


Image: Watch

How tax agents can kick the hourly billing habit

Image: Watch

It doesn't matter how many times you hear this question; there aren't many other questions quite as capable of putting an expert practitioner on the spot like a butterfly pinned to a display cabinet than the dreaded: ‘What's it going to cost?’

For accountants, lawyers and others who sell their expertise, it sometimes seems the only measure of value is the clock, but time – unlike money – is finite and never an accurate estimate of an expert's value.

Hourly billing is something most clients – and experts – can understand. It is tangible and easy to grasp and sell because it doesn't put a price on anything (at least when you’re trying to win the client). 

However, hourly billing is also widely disliked by both parties. It is not an accurate valuation of worth for the expert, and for the client, the final price remains a dreaded unknown. After all, how long is a piece of string?

The problem for many people who value their time by the hour is fear. They fear they may lose the client to somebody else who sets a tangible hourly fee, and they fear clients will become suspicious, or that there will be scope creep which leaves them out of pocket at the end of the day.

Unfortunately, the hourly bill also sets the expert up to be negotiated down and for limits to be set on a project's scope. It also opens them up to questions about how each unit of time was spent.

In essence, the biggest challenge to overcome with hourly billing is a change in mindset for both parties.

Base your value against objectives

Part of changing a client's mindset about project-based fees is to set expectations upfront.

Bestselling author Alan Weiss points out that clients know what they want, but they do not know what they need. As the expert in the relationship, your value-add comes from determining what it is they need.

Once you know the client's objective and – based on your knowledge of what they will need to get there – you are in a position to charge against a successful outcome across two or three scenarios. With most finance, tax and law-related issues, there will be varying levels of success. For example, a reduction in tax owed, or a write-off of tax owed or a repayment arrangement with the IRD.

The tax agent may spend the same amount of hours, give or take, in achieving one of those scenarios, but most people can agree that achieving a tax write-off for the client will be worth more to the client than a repayment arrangement with the IRD, and they'll be willing to pay accordingly. 

Take an unrelated scenario, say in public relations. A multi-national operating in New Zealand may be under pressure from the media because they are accused of engaging in environmentally unfriendly practices. The local pressure is costing the company thousands, but globally the costs and damages are running into the billions.

The consultant, drawing on his or her expertise, may spend just two hours conceiving a strategy so successful, the multi-national rolls it out across the globe. Based on hourly rates, they would have earned a grand total of $600. Is that a true reflection of value?

Three things to consider

To shift your practice to a more value-added billing system, try these steps:

  • Establish the client’s objectives. They may want the problem to 'just go away'. For example. letters of demand from the IRD. But what do they actually want? A repayment arrangement, a write-off of taxes, or a massive reduction in the debt?
  • Using your expertise, determine what they need. What are the possible outcomes, from the worst-case scenario to the best-case scenario?
  • Set your project-based fees against each scenario. For example, $900 for a repayment arrangement; $2000 for a partial debt write-off and a repayment plan or $4000 or a total write-off of the tax debt.

While every tax agent has an ethical duty to ensure the best possible outcome for clients, reality suggests that there will always be varying degrees of success. Charging against those ‘degrees’ of success may be a fairer outcome for all.

Finally, avoid seeing each client as a one-off problem to be resolved. Instead, view your first engagement as the start of a value-added relationship.

“As a professional engaged in providing service to your clients, the immediate urge may be to fix what ails the client. However, the long-term goals are best met by improving the client's condition.” – Alan Weiss


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.