Taxing times: Are you facing a cashflow crisis in April and May?

Image: Stressed person.

Tax represents cash and for all businesses, cash is king – especially in April and May.

After all, Inland Revenue (IRD) 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.

In some cases, IRD may already be charging interest (currently seven percent) on this amount.

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 IRD’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 IRD 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 IRD 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 IRD 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 IRD 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 IRD-approved tax pooling provider, we can apply backdated tax paid to IRD 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 IRD account.

The interest you pay TMNZ is significantly cheaper than what IRD charges for underpaid tax.

Once IRD processes this transaction, it will treat it as if you paid on time.

This clears any IRD interest and late payment penalties showing on your account.

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 IRD 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 IRD account to your IRD 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 IRD charges for missed or underpaid tax.

Please contact TMNZ if you have any questions about tax pooling. We’re happy to help.

 


Image: Residential property

Property tax changes announced – what you need to know

Image: Residential property

Property investors will no longer be able to offset their interest expenses against rental income when calculating their tax.

This is one of three tax measures announced today by the Government as it attempts to cool the overheating New Zealand housing market.

The others include:

  • Extending the bright-line test to 10 years.
  • A ‘change-of-use’ rule within that test which will apply when a property is not used as the main home for more than 12 months at a time.

Below we explain what each measure means for property investors.

Removal of interest deductions

Currently when residential investment property owners calculate their taxable income they can deduct the interest on loans that relate to the income from those properties.

They can claim this as expense, therefore reducing the tax they need to pay.

However, the Government has decided to change the rules to remove residential investment property owners’ ability to do this.

The legislation will apply from 1 October 2021.

The impact

From 1 October 2021, you will be unable to claim interest deductions on residential investment property you acquire on or after 27 March 2021.

Interest on loans for properties acquired before 27 March 2021 can still be claimed as an expense.

However, the claimable amount will be reduced over the next four income years until it's completely phased out.

From the 2026 tax year onward, you will be unable to claim any interest expense as deductions against your income.

If your tax year runs from 1 April to 31 March, the proposed change will be phased in as per the table below.

Tax year Percent of interest you can claim
2021 (1 April 2020-31 March 2021) 100 percent
2022 (1 April 2021-31 March 2022) 1 April 2021 to 30 September 2021 – 100 percent
1 October 2021 to 31 March 2022 – 75 percent
2023 (1 April 2022-31 March 2023) 75 percent
2024 (1 April 2023-31 March 2024) 50 percent
2025 (1 April 2024-31 March 2025) 25 percent
2026 (1 April 2025-31 March 2026)-onward 0 percent

If money is borrowed on or after 27 March 2021 to maintain or improve property acquired before 27 March 2021, it will be treated the same as a loan for a property acquired on or after 27 March 2021.

That means you will be unable to claim interest as an expense from 1 October 2021.

Property developers who pay tax on the sale of property will not be affected by this change and will still be able to claim interest as an expense.

Next steps

The Government is to consult on the detail of these proposals and will introduce legislation shortly thereafter.

Consultation will cover an exemption for new builds acquired as a residential investment property.

There will also be a decision around whether all people who are liable to pay tax on the sale of a property – for example, under the bright-line tests – should be able to deduct their interest expense at the time of sale.

Bright-line test extension

The bright-line test means if you sell a residential property within a set period after purchasing it you will have to pay income tax on any profit made through the property increasing in value, unless an exemption applies (keep reading).

The Government plans to extend the bright-line test from five years to 10 years.

This will apply for properties purchased on or after 27 March 2021.

However, the test for new build investment properties will remain at the current five years to support the goal of increasing housing supply.

A property acquired on or after 27 March 2021 will be treated as having been acquired before 27 March 2021 – provided the purchase was the result of an offer the purchaser made on or before 23 March 2021 that cannot be withdrawn before 27 March 2021.

There will be consultation with the tax and property communities over the coming months to help determine the definition of a new build.

However, the intention is to include properties that someone acquires within a year of the property receiving its code compliance certificate.

The Government will introduce into Parliament legislation defining 'new builds' and excluding them from the 10-year bright-line test following consultation.

It intends for the legislation to be retrospective.

As such, new builds acquired on or after 27 March 2021 will continue to be subject to the five-year bright-line test.

The family home and property that you inherit will continue to be exempt from the bright-line test.

Introduction of change-of-use’ rule

For residential properties acquired on or after 27 March 2021, including new builds, the Government intends to introduce a 'change-of-use' rule.

This will affect the way you calculate tax under the bright-line test if you do not use the property as your main home for more than 12 months at a time within the applicable bright-line period.

If a property switches to or from being your main home and the period when it is not your main home is 12 months or less, you do not need to count that as a change-of-use.

Put simply, you can treat those non-main home days as main home days.

Those subject to the change-of-use rule will have to pay income tax on a proportion of the profit made through the property increasing in value.

You will calculate that as follows:

  • Subtract the purchase price from the sale price
  • Minus the cost of capital improvements you have made
  • Subtract the costs to buy and sell the property; and
  • Multiply the result by the proportion of time you were not using the property as your main home.

Existing main home exclusion rules will still apply if a property was acquired on or after 29 March 2018 and before 27 March 2021.

Further reading

IRD has prepared two fact sheets about the removal of interest deductions and the extension of the bright-line test:

Both contain examples that illustrate how the department will apply the proposed changes.

There is also a section on the IRD website regarding tax on property.

Talk with your accountant

We recommend you speak to your accountant if you have any questions about how these changes impact you as a property investor.

If you don't have an accountant, here is a directory of tax advisers we work with across New Zealand. One of these firms will be able to steer you right.


Terminal tax isn’t due until 7 April – so why's IRD already charging interest?

Image: Puzzled person

Just because a terminal tax amount for the 2019-20 income year is not due and payable until 7 April does not mean Inland Revenue (IRD) is not already charging interest.

Why is this happening, you may be asking?

There could be several reasons. The method used to calculate your provisional tax payments, your income tax liability for the year or whether you underpaid or failed to pay an instalment on time and in full can all be factors.

However, to understand why that might be happening, one needs to understand the different interest rules that apply for provisional taxpayers.

Below we explain how they work for those who used the standard uplift or estimation methods to calculate their payments during the 2019-20 income year.

We also cover the somewhat unfair rules that apply for new provisional taxpayers in their first year of trading because these often catch people out.

Standard uplift method

Please refer to the table below.

If your income tax liability for the year is… And you paid… Then…
Less than $60,000 All uplift instalments on time and in full or had no obligation to pay provisional tax for the year. IRD interest should only apply from your terminal tax date if you fail to pay by then the final balance required to satisfy your liability for the 2019-20 income year.
$60,000 or more The uplift instalments on time and in full at all instalment dates prior to the last one.  

Any final balance remaining to settle what is owed for the year at the date of the final instalment.

IRD interest should only apply from the date of your final instalment if you fail to pay by then the remaining balance to satisfy your liability for the 2019-20 income year.

But what happens if you did not pay an uplift instalment on time or in full?

In this situation, the following rules will apply.

When provisional tax is underpaid or paid late at an instalment date prior to the final one for the 2019-20 income year, IRD will charge interest on the lesser of:

  • The uplift payment due, minus any amount paid in relation to that instalment; or
  • The actual income tax liability for the year divided by the number of instalment dates for the year, minus any amount paid in relation to that instalment.

At the date of the final instalment, IRD will also charge interest on the remaining balance owing to settle your liability for the year.

Estimation method

For those who used or switched to the estimation method at any time during their 2019-20 income year, IRD may be charging interest as far back as the date of the first provisional tax instalment if you did not pay enough tax to satisfy your actual liability.

Interest will be charged based on the following: The income tax liability for the year divided by the number of instalments payable for the year, minus any amount paid in relation to that instalment.

New provisional taxpayers

A different set of rules apply to those in their first year of trading whose income tax liability is $60,000 or more.

That’s because they will be deemed to be a new provisional taxpayer.

A taxpayer must meet certain criteria to be considered a new provisional taxpayer. This criteria differs for individuals and companies/trusts.

For the 2019-20 income year, an individual is a new provisional taxpayer if they satisfy ALL of the below:

  • Their income tax liability for the year is $60,000 or more.
  • Their income tax liability in each of the four previous tax years was $2500* or less; and
  • They stopped receiving income from employment and started to receive income from a taxable activity during that tax year.

A Company/trust is a new provisional taxpayer in the 2019-20 income year if they satisfy ALL of the below:

  • Their income tax liability for that tax year is $60,000 or more; and
  • They did not receive taxable income from a taxable activity in any of the four previous years.
How many interest instalments

IRD will charge interest based on the number of instalments you could have paid if you are a new provisional taxpayer.

The number of instalments you could have paid is based on the date you started your taxable activity.

For those with a 31 March balance, please refer to the table below.

If your first year of trading starts… Then the number of provisional tax instalments payable is…
Before 29 July Three (28 August, 15 January and 7 May)
On/after 29 July but before 16 December Two (15 January and 7 May)
On 16 December or any time after that One (7 May)

These dates will differ if your balance date is not 31 March or you file GST returns on a six-monthly basis.

Interest will be charged based on the following: The income tax liability for the year divided by the number of instalments payable for the year, minus any amount paid in relation to that instalment.

*For the 2020-21 income year onward, the threshold was increased to $5000.

How Tax Management NZ can help

If there is IRD interest showing on your account, there's a way to reduce this cost significantly.

As an IRD-approved tax pooling provider, Tax Management NZ (TMNZ) can apply tax paid to IRD on the original due date against your liability if you have missed or underpaid your provisional tax for the 2019-20 income year.

This wipes any IRD interest and late payment penalties showing on your account.

How it works

You pay the core tax plus TMNZ’s interest to us rather than paying IRD directly.

Once we receive your payment, we transfer the date-stamped tax amount you require from our account at IRD to your IRD account.

As the tax carries a date stamp, IRD treats it as if you have paid on time once it processes this tax pooling transaction. This eliminates any late payment penalties incurred.

TMNZ’s interest cost can be significantly cheaper than the interest IRD charges if you underpay your tax. As of 8 May 2020, IRD debit interest is currently seven percent.

You have up to 75 days past your terminal tax date for that tax year to pay the additional provisional or terminal tax you owe via TMNZ.

That means if you have a 7 April 2021 terminal tax date, you have until mid-June to settle your income tax for the 2019-20 income year.

Please contact us if you have any questions about tax pooling.


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 (IRD) that you could be utilising in your business. Conversely, you don’t want to underpay because you run the risk of facing IRD interest of seven percent and late payment penalties from the date of your underpayment.

Tax pooling offers a safety net if you cannot make your 15 January payment on time or accurately forecast your payment due to the impact of COVID-19.

It's a service that offers benefits not available to those who pay IRD directly, at no downside.

Pay provisional tax when it suits you

The Christmas-early New Year period is often a challenging time. After all, it is a four-week break from business as usual as things slow down.

For someone looking to manage cashflow, tax pooling lets you pay your 15 January provisional tax when it suits you.

Acceptance is guaranteed, and no security is required.

As an IRD-approved tax pooling provider, Tax Management NZ (TMNZ) can be used to pay your tax on the actual date it is due (e.g. 15 January 2021).

You then pay TMNZ as soon as cash is available and IRD recognises it as if the money was paid on time by you.

There are a couple of ways to pay.

You can finance your provisional tax payment. This sees you pay a fixed interest cost upfront and then the core tax amount at an agreed date in the future.

Alternatively, you can enter an instalment arrangement. Under this payment plan, interest is recalculated on the core tax amount owing at the end of each month.

The instalment arrangement offers flexibility in the sense you can pay as and when it suits your cashflow.

All tax pooling arrangements eliminate late payment penalties. The interest payable is significantly cheaper than the seven percent IRD charges if you fail to pay on time.  

Pay what you think, top up later

Most taxpayers tend to base their provisional tax on a 105 percent uplift of the previous year’s liability.

However, the current economic climate may have forced some in highly impacted sectors to revise expectations around profitability for the 2020-21 income year to the point where making payments based on the calculation above is no longer appropriate.

Others simply may be facing difficulty forecasting their liability due to the uncertainty of COVID-19. As such, they may want to keep cash close at hand in case things change suddenly.

Now there is some good news.

You do not need to pay provisional tax on 15 January based on uplift, nor do you have to file an estimate to pay less than uplift.

Instead you can pay provisional tax based on your forecast expectations of profitability for the year at the time.

Don't worry if, once you determine the liability for the 2020-21 income year, it transpires that you have underpaid. You can purchase any additional tax you owe on 15 January 2021 from TMNZ.

This can be done at a cost that is less than IR’s debit interest rate. It also eliminates any late payment penalties incurred.

That's because the tax you are purchasing from TMNZ was paid to IRD on the date it was originally due.

You pay the core tax plus TMNZ's interest cost when you make your payment to TMNZ. TMNZ then applies the date-stamped tax sitting in its IRD account against your liability.  

IRD will treat it is if you paid on 15 January 2021 once it processes this transaction. The remits any late payment penalties showing on your account.

Please contact us if you have any questions about tax pooling.


How to overcome the pain of tax procrastination

With Inland Revenue (IRD) currently charging a penalty of seven percent interest, you would think that every single business owner in New Zealand would be highly motivated to get their tax issues sorted.

Why then, is tax procrastination a problem?

Tax is an obligation. We have no choice but to get on top of it. Whether that's paying on time if we can or, if we can't, making alternative arrangements. Solutions may include tax pooling through Tax Management NZ or reaching an agreement with IRD. However, there is a segment of Kiwi taxpayers who continue to bury their heads in the sand despite the potential pain it may cause.

However, tax procrastination, it turns out, is a 'thing' and it's not laziness either.

Dr Piers Steel, author of the book The Procrastination Equation: How to Stop Putting Things Off and Start Getting Stuff Done calls procrastination 'self-harm'. It's hard to argue with him when you consider the breath-taking tax penalty regime we face in New Zealand.

Dr Fuschia Sirois, a professor of psychology at the University of Sheffield, recently told the New York Times: “Procrastination isn’t a unique character flaw or a mysterious curse on your ability to manage time, but a way of coping with challenging emotions and negative moods induced by certain tasks — boredom, anxiety, insecurity, frustration, resentment, self-doubt and beyond”.

In short, we use procrastination to manage an immediate negative mood rather than with getting on with the task.

Beating tax procrastination

Carleton University’s Tim Pychyl suggests that the next time you feel inclined to put off something – like getting your tax sorted – you should simplify your focus down to taking the first step. The very next action helps shift your primary emotion.

“Once we get started, we’re typically able to keep going. Getting started is everything,” he says.

First tasks

Having a handful of obvious first steps you can take will help start you on that critical first step.

1. First step, get expert advice

If you are concerned about cashflow, particularly in this year marred by COVID-19, find a tax adviser (your accountant or tax consultant). Should you already have one, pick up the phone and speak to him or her about your options – even if it's to book an appointment.

Take that first step.

2. List your next steps

In partnership with your tax adviser, get an understanding of what all your options are. These may include tax pooling or coming to an arrangement with IRD for an extension, or a repayment schedule. Do you qualify for Working for Families or the temporary tax loss carry-back regime?

Knowing your options helps you put in place tangible next steps.

3. Reduce the workload

Sometimes the thought of having to gather all the bits and pieces of information we need can seem like a chore well worth postponing. To combat this, put in place a system that keeps your source of financial information at your fingertips.

One Auckland accounting firm reports that they have to chase at least 30 percent off their clients for 'bits of information' and it can take months. Most businesses are GST registered, which means that at least 90 percent of your needed business data is already available by the time you file your GST return. Almost every accounting software package on the market will likely have an app that lets you track receipts and other financial information in real-time.

According to research, procrastination (in all its guises) can be associated with high stress and related acute health problems. That's because the things we procrastinate never go away.

Avoid the costs of tax procrastination. Know what steps you're going to take and start taking them today.


IRD eyeing cryptoassets: Tax implications for investors

Image: Cryptoassets

Come clean or expect Inland Revenue (IRD) to come calling.

For investors who are unaware of their tax obligations, this is the situation they face in the wake of the New Zealand tax department exercising its powers under the Tax Administration Act 1994 to request customer information from companies dealing with cryptoassets.

This appears to be part of a OECD initiative. The intergovernmental economic organisation recently released a comprehensive overview of the current tax treatment and tax policy gaps across the main taxes applicable to cryptoassets. This report looks at more than 50 jurisdictions, including all G20 and OECD nations.

IRD says it wants to help people get things right from the start.

It will not be surprising if investors receive a letter reminding them of their obligations and encouraging them to fess up if they have failed to disclose any income made from cryptoassets.

And investors would be wise to take heed of this correspondence.

After all, the information requested from cryptoasset companies includes customer blockchain wallet addresses and transactions until 31 March 2020.

It’s this type of data that may enable IRD to find other cryptoasset exchanges someone uses –  even if those exchanges are based overseas –  and compare the profile of cryptoasset investors against the position taken in their tax returns to see if there are any anomalies.

Don’t underestimate the department either. Its investigation staff are very effective at using this type of information to connect the dots. Just look at their work in the ‘Hidden Economy’.

What will be fascinating to see is just how much tax IRD is able to recover.

It has the potential to be quite a significant sum as the tax implications of cryptoassets do not appear to be widely understood by investors.


Tax treatment of cryptoassets

IRD treats cryptoassets as property for the purposes of tax, so normal income tax rules apply.

Its default view is that most people acquire cryptoassets with the intention of selling them. That’s because cryptoassets don’t pay interest and it’s only upon disposal that someone will realise a return on their investment.

This is very similar to its position on gold.

As such, in most cases, the profit an investor makes from disposing or exchanging cryptoassets is taxable.

To determine if tax is payable, IRD will look at the main purpose for acquiring cryptoassets at the time of acquisition.

Unless a person can provide clear and compelling evidence that shows they did not acquire cryptoassets with the intention of selling them, they must pay tax.

It does not matter how long someone plans to hold on to cryptoassets for before selling or exchanging them. A person’s main purpose can still be to sell or exchange them, even if it takes a several years for them to do so.

Cryptoasset income must be included as ‘other income’, business income or self-employed income in tax returns.

People must also keep accurate and complete cryptoasset records. They must hold these for at least seven years.

You can find more information on IRD’s website. It recently issued updated guidance on the tax treatment of cryptoassets.

This is a useful starting point and explains how it sees the rules applying for individuals and businesses. They even provide a few examples, too.

We strongly recommend you cast your eyes across this.


What to do now?

Investors would be wise to weigh up their next move now that IRD is looking further into cryptoassets.

The first thing to do is to speak to an accountant if you are unsure of your tax obligations. After all, this is a complex area and specialist advice should be sought.

In the event someone discovers they do have tax to pay on the profit they made from selling, trading, exchanging, mining or staking cryptoassets, they should consider making a voluntary disclosure.

The consequence of not disclosing taxable income can be brutal, with IRD charging shortfall penalties of up to 150 percent of the tax liability and usurious interest. The latter is currently seven percent, although has been much higher.

However, the truth shall set you free.

Making a voluntary disclosure can see shortfall penalties eliminated. Even if IRD has notified someone of an impending audit, there is still a possibility of a 40 percent reduction in shortfall penalties if someone comes clean before the investigation commences.


Reduce the interest cost with tax pooling

An IRD-approved tax pooling provider such as Tax Management NZ (TMNZ) can be used to reduce the interest cost significantly, if someone owes additional income tax due to failing to disclose the profit they made from their cryptoassets.

TMNZ lets someone apply tax that was paid to IRD on the original due date(s) against their liability.

As such, IRD treats it as if they paid on time once it processes this tax pooling transaction. This eliminates any late payment penalties. Please note the legislation prohibits tax pooling from assisting with shortfall penalties.

For the current tax year (2021) or one just completed (2020), someone has up to 75 days past their terminal tax date for that tax year to pay the additional income tax they owe via TMNZ.

In the event a person receives a notice of reassessment from IRD due to an audit or voluntary disclosure, they can use TMNZ to reduce the interest cost on the difference between the original assessment amount and the reassessment amount.

We can assist with provisional and terminal tax, and other tax types such as GST, PAYE and FBT when there’s a reassessment.

Someone has up to 60 days from the date IRD issues the reassessment notice to pay the tax they owe via TMNZ.

Please contact us if you have any questions about tax pooling. We’re happy to help.

 


Important considerations: 28 October provisional tax

Image: Cow

The outbreak of COVID-19 is making it even trickier to work out how much provisional tax to pay, not to mention finding the funds to pay it.

That’s why, with 28 October approaching, we’re going to offer a couple of pointers to consider as you look to manage this uncertainty in a pandemic-impacted environment.

This includes an option to defer this payment for up to 19 months – without having to worry about any nasty consequence from Inland Revenue (IRD). Feel free to skip the boring stuff and scroll straight to that section now.

We also look at the pros and cons of the respective options available to calculate your payment.

For taxpayers with a 31 March balance date who file their GST returns every six months, 28 October will be the first of two provisional tax instalments payable for the 2020-21 income year.

It is also the first of three instalments payable for those with a 31 May year-end who file their GST returns monthly or every two months.

As you can see, it looms as an important payment date.


What should you pay?

Ah, that’s the $64,000 question really.

Even more so given that you probably don’t keep a crystal ball in the top left drawer of your desk into which you can gaze upon the future to ascertain just how much of an impact COVID-19 may have on your bottom line.

But while working out the liability to the exact cent is far from easy – even at the best of times – it does not change the fact you generally have two options when it comes to calculating your provisional tax payments.

They are:


  • Pay based on an uplift of an income tax liability from a pre COVID-19 time. This is known as using the standard uplift method.
  • Pay based on your current expectation of profitability for the 2020-21 income year.


Paying based on an uplift of a prior year

If you travel down this route, the provisional tax payable for the 2020-21 income year will be based on either:


  • Your 2020 income tax liability plus five percent; or
  • Your 2019 income tax liability plus 10 percent (if your accountant has not filed your 2020 tax return and does not legally have to do so until 31 March 2021).

The benefit of paying uplift means you will not incur IRD interest (UOMI) – currently seven percent – from 28 October 2020 if it turns out you have not paid enough provisional tax to satisfy the liability for the year.

Given this is the date which carries the longest exposure to UOMI, sticking with uplift may be a sound insurance policy if you feel a similar result to last year is on the cards or want to play it safe in this uncertain environment to ensure you are not caught short later if business picks up down the track.

And besides, if things turn to custard, you can always revise your payment downwards later to account for any overpayment on 28 October once the picture starts to become clearer.

However, the downside of paying on uplift means you may end up making a provisional tax payment that is not reflective of your current earnings (or more than your expected profitability for the year).

From a cashflow perspective, that can be problematic as generally you will not be able to get your overpaid tax back from IRD until after you have filed your 2020-21 income tax return.


Paying based on forecast profitability

Indeed, there’s no denying COVID-19 has delivered a Jerry Collins-esque tackle to economy. More than 85 percent of SMEs are expecting a lower profit in the next nine months, according to New Zealand’s Prosper Small Business Resilience Survey.

As such, you may be considering making a payment on 28 October that is more in line with how you are currently performing – especially if your business earnings have been significantly impacted by the restrictions imposed at alert levels two, three and four, a lack of international tourists, supply pipeline issues or something else related to the outbreak of the virus.

On plus side, you won’t be paying any more provisional tax than you need to if you choose to do this. That will certainly offer a cashflow benefit by allowing you to keep money in your business.

You can always revise payments upward or downward depending on how everything unfolds.

However, it means you run the risk of incurring UOMI from 28 October 2020 if you experience a sudden or late upswing in profitability during the backend of the 2020-21 income year and provisional tax paid on this dates turns out to be less than the amount required.

That said, there is a way to reduce the interest cost on underpaid tax. More on that shortly.


Do you need to file an estimate with IRD to pay less than uplift?

We get this question a lot.

You do not – repeat, do not – need to file an estimate with IRD if you plan on paying provisional tax based on your expected profitability for the 2020-21 income year. There is no legislative requirement to do so.

Just make your payment on 28 October as you see fit.


Tax pooling can help if you cannot pay, or it turns out you have not paid enough

No matter the basis you utilise to calculate your 28 October payment, an IRD-approved tax pooling provider such as Tax Management NZ (TMNZ) can offer some assistance.

They offer payment options for taxpayers who:


  • Do not or cannot make their payment on the prescribed IRD payment date.
  • Want to eliminate IRD interest and late payment penalties if they underpay their tax.


Pay 28 October provisional tax when it suits you

Where preserving cash is of primary importance, you can use TMNZ to defer an upcoming provisional tax payment for up to 19 months, without facing UOMI and late payment penalties.

TMNZ will make a payment to IRD on your behalf on 28 October. You then pay TMNZ later.

This can be once the liability for the 2020-21 income year is known or when your cashflow situation improves.

The amount owed can also be paid in instalments.

You would have until mid-June 2022 to pay what you owe with Flexitax® if you have a 7 April terminal tax date. Check with your accountant if you are unsure what your terminal tax date is.

There is some interest to pay to TMNZ – but this is significantly cheaper than IRD’s UOMI rate.


Reduce the cost of underpaid tax

Tax pooling is not just for those who are struggling to pay the taxman on time.

Where forecasting profitability for the 2020-21 income year is proving challenging or you would simply prefer to make your provisional tax payments based on how your business is performing by reviewing your position at each instalment date, you can rest easy knowing that TMNZ can help in the event you get your payments wrong and wind up with additional tax to pay.

That’s because you can use TMNZ to make significant savings on the Inland Revenue interest cost you face and wipe late payment penalties when you underpay tax.

How?

TMNZ lets you apply provisional tax that was originally paid to the tax department on the date(s) it was due against your liability.

As such, IRD treats it as if you paid on time once it processes this tax pooling transaction. This eliminates any late payment penalties.

You have up to 75 days from your terminal tax date for the 2020-21 income year to pay any underpaid provisional tax with TMNZ.

It’s a useful option to pull out of your back pocket once you determine your actual position and file your return.

The savings TMNZ offers on underpaid tax can be significant.


Speak with your accountant

As always, we recommend you speak with and direct any questions you have about your 28 October provisional tax payment to your accountant.

If you don’t have an accountant, check out the directory of firms that TMNZ works alongside.

You can filter this list by specialist topic or search for a tax agent in your region.

 


Increased provisional tax threshold explained

A taxpayer has no obligation to pay provisional tax for the 2020-21 income year if their liability for the previous year was $5000 or less.

In most cases, any income tax payable for the upcoming year will be due at their terminal tax date. That said, there are some exceptions to this rule.

We are mentioning the increased provisional tax threshold because there appears to be confusion about how it works as we near 28 August 2020.

Background

Earlier this year, IRD announced that it was doubling the point at which someone enters the provisional tax regime.

Previously, someone became a provisional taxpayer if their income tax liability for the previous year was more than $2500. The threshold is now $5000.

This is a permanent change. It was designed to deliver a cashflow benefit to smaller taxpayers, particularly in the wake of COVID-19. Moreover, it was one of the recommendations in the Tax Working Group's final report.

The new threshold applies for the 2020-21 income year onward.

The impact

Generally speaking, provisional tax payable for the year equals either:

  • Last year’s income tax liability, plus five percent; or
  • The income tax liability from two years ago, plus 10 percent (if last year’s return has yet to be filed). This mainly applies to those who have an accountant with an extension of time filing arrangement.

However, as a result of the increase to the threshold, a person who was previously paying provisional tax under the old threshold won't have to pay provisional tax for the upcoming year if their income tax liability for the prior tax period(s) was $5000 or less.

IRD estimates that around 95,000 taxpayers will benefit from this change.

Example

Someone with a 31 March balance date has the following information for the past two income years. They filed their return for the 2019-20 income year on 7 July 2020.

Income year Income tax liability
2018-19 $3500
2019-20 $4000

As you can see, this person had an obligation to pay provisional tax in the 2019-20 income year under the old threshold. That’s because their 2018-19 income tax liability was more than $2500.

However, because their 2019-20 income tax liability is less than $5000, there is no requirement to make provisional tax payments during the upcoming year.  

Where is the income tax due and payable?

Using the facts above, and assuming the income tax bill for the 2020-21 income year is less than $60,000, then everything is due and payable at the taxpayer’s terminal tax date.

This is because they fall under the safe harbour interest threshold.

For many taxpayers, terminal tax for the 2020-21 income year will be due on either be 7 February 2022 or 7 April 2022. Check with your accountant if you are unsure.

IRD will only charge interest and late payment penalties from this date if a taxpayer has not paid what they owe by then.

However, please note the interest rules will work differently if the liability is $60,000 or more.

In that situation, a taxpayer should settle what they owe for 2020-21 income year on the date that would have been their final provisional tax instalment for that year. For those with a 31 March year-end, this payment will be due on 7 May 2021.

They will incur IRD interest from this date if they fail to pay their tax by then.

Different interest rules also apply for those in their first year of business who have an income tax liability of $60,000 or more.

These can be quite complex. The reason why is the interest start date is determined by the date someone started to derive income from their taxable activity.

Please contact us if you have any questions.


UOMI remission guidance: IRD overlooks provisional tax scenario

Image: Question mark.

Question: What is the amount on which IRD will remit interest (UOMI) at the date of the final provisional tax instalment if someone outside of safe harbour is unable to pay on time due to COVID-19?

The answer: We cannot say for certain as this is a scenario IRD has yet to address in its guidance (as of today’s date).

A taxpayer expecting their RIT for the year to be $60,000 or more must pay the remaining balance to settle their liability at the date of their final provisional tax instalment to avoid incurring UOMI.

For those with a 31 March balance date, 7 May 2020 is the final instalment for the 2020 tax year.

A problem that arises is someone might not know the actual RIT for the year by this date. In fact, it might be several months after the year-end before they determine this figure.

As paying the remaining balance on 7 May 2020 will therefore require some guesswork, there is a chance they could miscalculate and end up underpaying.

Example

A taxpayer expects to have RIT of $80,000 in the 2020 tax year and must pay the final balance on 7 May 2020 to avoid UOMI.

They believe the final balance to settle the RIT for the year will be $40,000.

However, because of COVID-19, they are unable to pay on 7 May 2020 and decide to seek assistance from IRD.

The department agrees to grant a remission of UOMI on the $40,000 for eight months under s183ABAB Tax Administration Act 1994.

However, when the taxpayer finalises their return eight months later, it turns out their 2020 RIT is $85,000.

This means they should have paid $45,000 on 7 May 2020 to settle the liability for this year.

All of which begs the question: How will the remission of UOMI work in this instance?

Below we look at three possible approaches IRD may take.

Option one

IRD might only agree to remit UOMI on the $40,000 because:

  • This is what the taxpayer determined what was due and payable on 7 May 2020 under sRC10 (5) and (6) Income Tax Act 2007; and
  • The taxpayer should have had a reasonable expectation of their final liability for the 2020 year given the 7 May 2020 instalment is due after their year-end.

Option two

IRD may take an approach where its UOMI remission at the date of the final instalment applies to the lesser of:

  • The amount calculated by the taxpayer to the settle the liability ($40,000); or
  • The amount that is required to settle the liability ($45,000).

In both options one and two, the taxpayer will liable for UOMI on the $5000 shortfall from 8 May 2020 until this is paid.

Option three

IRD might be generous and agree to remit UOMI on the final balance of $45,000.

If that’s the case, a taxpayer unable to pay on time due COVID-19 receives a major concession for their miscalculation.

Flexitax® is your safeguard

However, this is merely speculation at this stage.

Until IRD clarifies its position, a taxpayer may wish to consider entering a Flexitax® arrangement as a safeguard.

If the department agrees to a full UOMI remission, cool bananas. There’s no requirement to follow through with the arrangement.

If IRD only agrees to waive UOMI on the amount calculated by the taxpayer, then Flexitax® lets them significantly reduce the interest cost they face on any additional tax payable.

As always, we look forward to the department’s clarification.

Over to you, IRD.

 


Harrison Grierson mitigates provisional tax risk

For Matthew Fleming, provisional tax is risky business as it requires a degree of crystal-ball gazing and guesswork.

However, he chooses to mitigate that risk by depositing these payments into Tax Management NZ’s tax pool account.

It's a “no-brainer” because it gives him a better return if he overpays provisional tax and reduces his interest and late payment penalty costs if he underpays.

More about Matthew Fleming

Matthew is the chief financial officer at Harrison Grierson, one of New Zealand’s leading engineering and design consultancies.

It has offices throughout Aotearoa and predominately provides services locally, with more than 350 staff on the books.

Remarkably, the firm is blowing out 135 candles this year. No-one stands the test of time for that long if they ain’t good at what they do.

And Harrison Grierson is good at what it does. A quick peruse of the significant projects is has been associated with during its lifetime is a testament to that.

Provisional tax is 'difficult to predict'

However, like most businesses, it is not immune to the problems provisional tax poses.

Matthew admits calculating the amount of income tax Harrison Grierson must pay IRD requires guesswork as its cashflow is up and down at certain times.

He knows the lay of the land during the first quarter – but the rest of the year can go either way.

“It’s hard enough to try and guess next month’s results, but when you’re having to guesstimate your final year’s tax liability accurately, [it] does take a certain degree of crystal-ball gazing,” says Matthew.

“We try to project our income and where our costs are going to be and having to pay tax on that sort of basis is a little bit of a risk.”

Even more so when one considers the taxman’s wide interest spread. They charge 8.35 percent if someone underpays provisional tax and pay just 0.81 percent if they overpay.

In other words, provisional tax is difficult to get right and very expensive when someone gets it wrong.

How Matthew manages that risk

Matthew chooses to deposit Harrison Grierson's provisional tax payments into TMNZ's tax pool.

It's an account operated by an IRD-approved tax pooling provider that allows taxpayers to combine their payments. The overpayments from some can then be used to offset the underpayments by others.

TMNZ's tax pool account sits at IRD and is overseen by an independent trustee.

Harrison Grierson keeps its date-stamped tax deposits in this account until Matthew confirms its liability for the year. He then arranges for the transfer of these deposits to the firm's own IRD account to satisfy what they owe.

If they have surplus tax remaining, he can earn additional interest by selling this to someone who has underpaid. (This is subject to market demand, which has been severely impacted by the COVID-19 pandemic.)

Conversely, if not enough tax has been paid, Matthew can reduce the IRD interest cost and eliminate any late payment penalties Harrison Grierson faces through purchasing the tax they require from another taxpayer and applying it against the company’s own liability when he arranges their transfers from the pool.

Matthew: 'TMNZ makes provisional tax easier'

Matthew is a big proponent of the benefit TMNZ delivers when his provisional tax calculations go askew.

“[Tax pooling’s] such a great service in terms of advantaging taxpayers when they are trying to estimate their liabilities and are struggling with it,” he says.

“The ability to get a return when you have overpaid and the ability not to pay such punitive penalty rates when you have underpaid makes it a no-brainer.”

As someone who is having to estimate revenue and costs a lot, Matthew finds it useful that tax pooling gives him the flexibility and control to make payments “as we see fit” based on how the financial year is unfolding, without any considerable downside.

He also likes that he can access refunds faster – and without having to file a return. TMNZ makes it simple for him to manage the payments of the different entities belonging to Harrison Grierson as well.

Matthew recommends tax pooling to other businesses, particularly those with seasonal or volatile income.

“What makes Tax Management NZ an easy choice is it makes the whole provisional tax regime easier to deal with.”

Watch Matthew's interview below: