Make IRD interest, late payment penalties disappear

Image: Magician

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 (IRD) 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.

IRD charges interest – currently seven percent – 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 Tax Management NZ (TMNZ) operates with the blessing of IRD. 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 reduce the interest you pay by up to 30 percent.

You make your payment to TMNZ and we apply backdated tax that was paid to IRD 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 IRD 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 IRD

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 IRD.

You have 60 days from the date the IRD issues this notice to use tax pooling.

Please contact us if you have any questions.


Image: Big data

Audit claim data highlights level of IRD’s behind-the-scenes activity

Inland Revenue (IRD) is still actively reviewing taxpayers despite COVID-19 and the various business disruptions the pandemic has caused in the past 12 months, according to figures released by Accountancy Insurance.

They saw a 31 percent increase in claims in all categories during the 2020-21 financial year compared to the 2019-20 financial year.

In terms of the proportion of claims, most related to GST verification (55 percent) and income tax returns (nearly 28 percent).

GST verification claim activity increased by 48 percent and income tax return-related claim activity by 67 percent in the 12 months to 31 March 2021.

The income tax return claim activity included cases relating to two campaigns IRD commenced in late 2020: They were the increased enforcement of the bright-line rules in December and the Automatic Exchange of Financial Account Information programme in November.

Accountancy Insurance says the following taxpayer categories had the highest number of claims during the 2020-21 financial year:


  • Sole trader/partnership/non-trading company and trusts.
  • Business groups <$500,000-$3 million turnover.


Industries under the spotlight

As most know, IRD has access to several large data sources which they use to help identify high-risk industries where there could potentially be low levels of tax compliance.

Low levels of compliance are usually seen in sectors where there is a high level of cash transactions.

Hospitality and construction are two such industries that IRD monitors regularly. The tax department recently launched a new campaign aimed at the latter.

And as well as property and the real estate industry, IRD is also taking an interest in cryptoassets.

Accountancy Insurance notes that client risk review claim activity decreased by 62 percent in the 12 months to 31 March 2021. In fact, this accounted for just 9.74 percent of all claims.

However, that was likely because the businesses which are typically subject to these reviews and audits were the ones most affected by multiple COVID-19 lockdowns in 2020.

They expect things will return to normal throughout 2021 as IRD ramps up its audit activity.


Reminder: We can help with IRD audits and voluntary disclosures

As an IRD-approved tax pooling provider, Tax Management NZ (TMNZ) can be used to get significant savings on Inland Revenue interest if they owe additional tax as a result of IRD issuing a notice of reassessment after an audit or voluntary disclosure.

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 us from assisting with shortfall penalties.

A taxpayer can use TMNZ to reduce the interest cost on the difference between the original assessment amount and the reassessed amount that arises due to an audit or voluntary disclosure.

We can assist with income tax, and other tax types such as GST, PAYE and FBT when there is a reassessment.

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

TMNZ has the largest and oldest supply of audit tax in the market.

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

 


Image: Timber supply

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 Tax Management NZ (TMNZ) – provides a way for them to use the money set aside for Inland Revenue (IRD) 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, IRD 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 (currently seven percent) 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 IRD 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 IRD interest and late payment penalties under this arrangement.

TMNZ’s interest rates start from less than two percent. 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 IRD 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 IRD account on 7 May to be transferred to your IRD account.

IRD would treat it as if you paid on time once it processes this transaction. This wipes any IRD interest and late payment penalties showing on your account.

Feel free to contact TMNZ if you have any questions. We're happy to help.


Image: Miscalculate

Miscalculated your tax loss carry-back? Don’t worry – help is at hand

Tax pooling can reduce the interest cost a taxpayer faces significantly, if they have overestimated their loss under the temporary tax loss carry-back scheme.

Under the temporary Inland Revenue (IRD) scheme, those who expect to make a loss in the 2019-20 or 2020-21 income year can estimate that loss and use all (or a portion of it) to offset the profit made in the previous year.

A taxpayer can carry their loss back one year. For example, that would mean:


  • Losses from 2019-20 income year can be carried back to the 2018-19 income year.
  • Losses from the 2020-21 year can be carried back to the 2019-20 income year.

More information about the scheme and how it works is available here.

One of the major downsides of the loss carry-back scheme is a taxpayer falls outside of the IRD interest concession rules that apply for provisional taxpayers using the standard uplift method. This is because they must switch to the estimation method when determining the tax loss they wish to carry to back.


What happens if someone overstates their loss and receives a greater refund of tax for which they are eligible?

It means that normal IRD interest rules will apply for underpaid tax in the previous profit year.

For example, if someone with a 31 March balance date overestimated the loss they will make in the 2020-21 tax year and therefore has additional tax payable in the 2019-20 income year, IRD interest will apply from 28 August 2019, the date of their first instalment for the 2019-20 income year.

As of 8 May 2020, IRD charges interest of seven percent.

Moreover, the COVID-19 relief relating to remission of IRD interest is not available to taxpayers who use the temporary tax loss carry-back scheme.


How Tax Management NZ can help

If it turns out you have additional tax to pay in the 2018-19 or 2019-20 income year due to overstating your loss during the 2019-20 or 2020-21 income year, then help is available.

As an IRD-approved tax pooling provider, Tax Management NZ (TMNZ) can mitigate your exposure to the interest incurred on this tax.

That’s because we can apply backdated tax paid to IRD on the date it was originally due against your liability.

You make a payment directly to TMNZ comprising the core tax amount plus our interest. We then arrange a transfer of the tax you require from our IRD account 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.

Legislative deadlines do apply.

If you have any questions about tax pooling, please feel free to contact us. We’re here to help.

 


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 is up to 30 percent 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.


Image: Residential property

Don’t forget tax pooling as IRD targets residential property

Image: Residential property.

Tax pooling can reduce the interest cost significantly and eliminate late payment penalties if someone owes additional tax for failing to declare property transactions captured under the bright-line test.

An approved provider of the service such as Tax Management NZ (TMNZ) can help with income tax that arises from residential property sales during the current tax year or one just completed, as well as in situations where Inland Revenue (IRD) has issued a notice of reassessment.

We are reminding taxpayers and accountants of the significant savings we can offer on underpaid tax as IRD cracks down on those who have sold houses without paying tax on their profits.

It was a hot news topic just before Christmas.


In case you missed it…

Indeed, the department is cross-referencing tax returns with property transactions and contacting those who may be subject to the bright-line test. Changes in legislation over the last few years requiring IRD numbers to be supplied with all property transactions means it is considerably easier for them to do that.

It’s also another telling reminder of how IRD can match large volumes of data from a variety of different sources. Anyone who underestimates the reach of IRD does so at their own peril. Just ask those buying and selling cryptoassets.

Letters have gone to those whose property sales might be within the bright-line test.

Some letters advise that taxpayers will need to return this income in their next tax return. Others are showing the tax as being overdue (due to the sale occurring in the previous tax year).

IRD is also encouraging accountants to talk with clients who sold residential property to ensure they’re aware of their obligations.

They estimate that up to 25 percent of investors may not have paid the relevant tax.

And given the heat in the residential property market and the media attention that escalating prices are attracting across New Zealand, it’s likely this is just the beginning of the campaign.

Remember, there is no statute of limitations on how far back in time IRD can go if undisclosed profits from the sale of a property are taxable under the bright-line test.


Bright-line test – a brief overview

The bright-line test requires income tax to be paid on the gains made if a residential property is sold within two years if it was purchased between 1 October 2018 and 28 March 2018 inclusive, or within five years if it was bought on or after 29 March 2018.

This rule also applies to New Zealand tax residents who buy overseas residential properties.

Exclusions only apply for the sale of the main family home or when someone sells a property they inherit. The same applies if you’re the executor or administrator of a deceased estate.

Under the bright-line test, you can use the main home exclusion if the following two situations apply:


  • You have used a property as your main home for more than 50 percent of the time you’ve owned it.
  • You have used more than 50 percent of the property’s area (including your backyard, gardens and garage).

It’s important to remember that having the intention to use the property as your main home is not enough. You must have actually used it for this purpose.

You can only use the main home exclusion twice within a two-year period. It does not apply if you show a regular pattern of buying and selling residential property.

Please note the bright-line test does not replace existing property tax rules such as the ‘intention rule’. You might still need to pay tax on your property profits even if the bright-line rule does not apply.

You can find out more information on IRD’s website.


What to do if you have a received a letter

While a letter from IRD can be alarming, there may be no need to panic straightaway.

That’s because in some circumstances they may not be applying the law correctly due to not having all relevant facts. After all, they’re only as good as the information they have.

There have been cases where communication issued by the department relates to property sales that are exempt under the main home exemption or where a house was actually purchased before the bright-line test was introduced. Moreover, IRD is identifying property sales in the current tax year before the taxpayer has had a chance to discuss their position with their accountant or turn their mind to filing a tax return.

To their credit, they have at least publicly acknowledged they sent some letters by mistake.

Nonetheless, you should seek specialist advice if you are unsure just to be on the safe side.

Tax laws around property are numerous and complex, not to mention costly if not planned for in advance. After all, charges interest (currently seven percent) if you don’t pay your tax on time and late payment penalties.

Talking with a specialist will save you money whether there is or isn’t tax to pay on the profit made from a residential property sale.

If you have not returned the correct taxes, then you should complete a voluntary disclosure as soon as possible.

This can see the brutal shortfall penalties IRD may seek to impose on the unpaid tax reduced. Shortfall penalties range from 20 percent up to 150 percent of the tax liability.


How TMNZ can assist with bright-line transactions

If you owe additional tax due to the sale of a property under the bright-line test, TMNZ can apply tax paid to IRD on the original due date against your liability.

You pay the core tax plus TMNZ’s interest to us rather than paying IRD directly. Once we receive your payment, we transfer the date-stamped tax amount you require from our account at IRD to your IRD account.

As the tax carries a date stamp, IRD treats it as if you have paid on time once it processes this tax pooling transaction.

This eliminates any late payment penalties incurred. (Tax pooling cannot assist with shortfall penalties unfortunately.)

TMNZ’s interest cost you can give you significant savings on the interest IRD charges if you underpay your tax.

There are some legislative conditions that you must meet to use tax pooling.

For the current tax year (2021) or one just completed (2020), you have up to 75 days past your terminal tax date for that tax year to pay the additional provisional or terminal tax you owe via TMNZ.

In the event you receive a notice of reassessment from IRD, we can only assist with the difference between the original assessment amount and the reassessment amount.

You have up to 60 days from the date IRD issues the reassessment notice to pay the tax you owe via TMNZ.

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

 


Are these two common business traditions losing you money?

Image: Coins in a fountain

The practice of throwing coins into a fountain – to invoke the favour of the gods – is so widespread that in some places they have notices asking the public not to toss coins into the fountain because it's terrible for the fish.

There are some modern business practices that amount to the same thing.

Historians debate about where the practice of tossing coins into a fountain started, or the reasons for it. On the one hand, experts claim it was to 'invoke the favour of the gods' (make a wish) as they did in Ancient Greece or 'to thank the gods for clean water' as they did in Ancient Rome.

In any event, the objective of the activity is to derive a benefit. 

Regardless of the origins of the practice, it brings to mind two modern-day business traditions practised by New Zealand companies – all with some benefit in mind – but that potentially are no better than tossing money into a fountain:

  • Leasing office space
  • Waiting until a product or service is market-ready.

Expensive leases on office space

Until recently, leasing or buying expensive office space – once you outgrew your home office – was considered a natural next step for a business.

Part of the reasoning may be that a home office cannot necessarily accommodate a growing team and possibly doesn't present a professional image (depending on the business). 

The COVID-19 lockdowns this year brought the realisation that expensive office space – and the obligations associated with occupying an office – as well as all the perceived benefits, may be more traditional than practical.

Something the traditional office does well, however, is that it brings teams together – it fosters culture and innovation. 

An alternative, and less expensive option, to getting the best of both worlds may be moving into shared office space. A growing number of shared office space facilities offer companies (or individuals) options to hot desk, rent private office space on short term agreements or opt for a dedicated desk. 

Décor, utilities and services are all taken care of, and best of all, nobody is locked into long, onerous and expensive office leases.

Product ready or market-ready

Another common practice is for businesses to wait until a new product or service is ready-packaged and in saleable form – before they take it to market.

Market ready is another myth that may result in opportunity cost. Holding fire deprives you of the chance to test the market, and is a drain on cashflow, time and energy long before you can expect a return on your investment.

As bestselling business author David Burkus wrote in the Harvard Business Review, new product launches are always a gamble but selling a product before it exists “looks like an effective way to stack the deck with minimum losses and maximise possible gains.

“It may not be the right strategy for every industry. But if it's possible, consider selling your new product before it exists.”


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.