How to avoid singing the holiday cashflow blues

Image: Singing the blues.

Cash is king and having the necessary cashflow to see you through the Christmas-early New Year holiday period is important.

We say that because the most challenging payment date on the tax calendar – 15 January – is drawing near.

And if your cashflow is a bit of a dog’s breakie, then you would be best advised to start planning and assessing your options now before you come unstuck… badly.

That’s because 15 January is when those with a 31 March balance date must pay GST and their second instalment of provisional tax for the 2020-21 income year to Inland Revenue (IRD).

The Christmas-early New Year holiday is a four-week break from business as usual. Things often slow down during this period and cashflow difficulties can arise. The impact of COVID-19 may make things more challenging than usual if you are in a sector feeling the economic effects of the pandemic.

But calm your farm. There’s no need to panic just yet.

The secret to managing cashflow is having a plan. The five tips below will ensure you are able to enjoy your break over Christmas and the early New Year without fretting.

1. Know what you need

Establish your current cashflow position by reviewing your books and making sure they’re up to date.

A quick cashflow forecast and budget will help you figure out exactly what you require to cover overheads during the holiday period. This is important if it’s going to be several weeks before your income levels return to normal.

It will also help you identify any potential problems before they become actual problems.

If business is quieter during the Christmas-early New Year period, review the number of staff you have working during this time. No point having more people on than you need.

Finally, don’t forget to review your provisional tax payment. If your profitability expectations for the 2020-21 income year are now lower than initially forecast, consider lowering your payment. After all, there’s no need to pay more tax than you need to.

2. Invoice straightaway, chase payments

Send invoices for December and January well before Christmas. See if you can get customers who are closing over the holiday period to pay you before they shut for the year.

Don’t forget the squeakiest wheel always gets the grease, so make sure to chase customers who have outstanding bills to pay.

Find out if they can pay part of what they owe you if they are having cashflow difficulties of their own. Some money is better than no money.

3. Engage with lenders and IRD early

Having a chinwag sooner rather than later with your bank or other lenders about arranging covering facilities is a good idea if you think you will experience a cashflow problem during the Christmas-early New Year period.

Moreover, IRD is being more lenient than usual due to the impact COVID-19 is having on some sectors.

It has the power to waive the interest (currently seven percent) it charges as part of an instalment arrangement if you can demonstrate you are unable to pay on time because of COVID-19.

You will need to be proactive and contact them as soon as possible. Have some financial information readily available as you may need to supply this as part of the process.

Any remission of interest is discretionary and IRD will decide this on a case-by-case basis. And remember, this is not a holiday from paying tax. Should IRD accept your request for assistance, you will be expected to pay the tax you owe as soon as practicable.

4. Consider tax pooling

In the event IRD declines your request for relief, then make paying your GST on time and in full a priority.

You can use an approved tax pooling provider such as Tax Management NZ to enter a payment arrangement for the provisional tax.

This lets you defer payment of the full tax amount due on 15 January for up to 17 months or pay what you owe over that same period in instalments, without facing late payment penalties.

Acceptance is guaranteed. No financial information or security is needed.

There is some interest payable, but this is much cheaper than what IRD charges if it does not grant your request for remission.

That interest cost may be a negligible cost as tax pooling offers certainty.

5. Seek advice

Please contact your accountant if you have any concerns or questions about your cashflow and 15 January tax obligations.

A good adviser will work with you to come up with a plan to see you through the Christmas-early New Year period.


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.

 


Three tax pooling solutions for businesses impacted by COVID-19

Image: Solved Rubix Cube.

IRD has announced a suite of tax relief measures during COVID-19 to help struggling businesses.

However, a tax pooling provider such as Tax Management NZ (TMNZ) offers some solutions of its own for those wishing to manage cashflow, facing uncertainty about their profitability or needing access to funds during this difficult economic time:


  • Provisional tax payment deferral.
  • Reducing exposure to interest if someone miscalculates their income tax.
  • Using tax pool deposits as a line of credit.

Below we explain how these three tax pooling solutions work. We also compare them to IRD’s equivalent offering at this time.


1. Provisional tax payment deferral


Alternative to

IRD’s remission of interest if someone is unable to pay their tax on time.


Suitable for

Businesses who cannot pay on the prescribed instalment date due to cashflow constraints.


Drawback of IRD’s offering

At first glance, this looks pretty good. Even more so given IRD has the power to remit interest all the way up to 25 March 2022.

However, dig deeper and you will see its ability to wipe interest if a taxpayer fails to make a tax payment due after 14 February 2020 on time because of COVID-19 is discretionary.

That’s important to note.

Whenever discretion is in the mix, inconsistencies can arise and we have seen a number of these already.

There are also a few hoops to go through in terms of:


  • Requesting the relief as soon as possible.
  • Proving eligibility.
  • Providing accounting and financial information to support a claim.
  • Maintaining the agreed payment plan set by IRD to ensure there is no default. Remember, this is not a tax holiday. There is an obligation for someone to pay what they owe as soon as practicable.


TMNZ’s solution

For those wanting certainty of outcome or less hassle, tax pooling is a better option.

Indeed, someone wanting to manage their provisional tax payments in a way that better aligns with their cashflow requirements can defer an upcoming payment to a date in the future with TMNZ, without having to worry about late payment penalties.

For a taxpayer with a 31 March year-end, they would have up to 22 months from the date of the first instalment (28 August 2020) of the 2020-21 income year to settle their provisional tax.

That means payment would not need to be made until mid-June 2022.

Acceptance is guaranteed with tax pooling. No security or additional information is required.

There are a couple of ways to pay with TMNZ.

Someone can pay a fixed interest fee upfront and then the core tax at an agreed future date or make a one-off payment of interest and core tax when they figure out their liability.

They also have the option of paying what they owe in instalments.

TMNZ’s interest is much cheaper than the seven percent IRD otherwise charges if someone does not make a payment on time.

This cost may be negligible given a tax pooling arrangement is easier to set up, offers more payment flexibility and gives someone peace of mind at an uncertain time.


2. Reducing exposure to interest if someone miscalculates their income tax


Alternative to

IRD’s remission of interest on underpaid provisional tax for the 2020-21 income year for those using the standard uplift or estimation methods who are impacted by COVID-19.


Suitable for

Businesses who are uncertain how their year will play out due to the global pandemic.


Drawbacks of IRD’s offering

IRD’s recently announced relief is only for smaller- and medium-sized businesses with a liability of less than $1 million who can demonstrate their ability to forecast what they owe for the year at one or more provisional tax dates was “significantly adversely affected” by COVID-19.

In other words, any underpayment needs to be due to a change in circumstance that is totally out of their control (i.e. the border reopening), not human error. Those who have tools to forecast what they owe – as well as those who make no effort to forecast – are unlikely to qualify for the remission.

Someone not impacted by COVID-19 is expected to pay on time and in full.

The other thing to note is IRD will decide who qualifies for relief on a case-by-case basis after a taxpayer files their return for the 2020-21 income year.

Again, this is a discretionary power.

That poses a significant risk if someone is touch and go as to whether they meet the criteria for assistance. After all, if IRD declines their application, they will be up for IRD interest from the date of their first instalment for the 2020-21 income year.


TMNZ’s solution

A taxpayer facing uncertainty over their profitability for the upcoming year who does not want to pay provisional tax based on an uplift calculation from a pre-COVID-19 time has another option if they are unlikely to qualify for this remission.

They can make their provisional tax payments based on how their year is unfolding – and then use TMNZ to wipe late payment penalties and reduce the interest cost they face if they end up underpaying their tax.

We offer significant savings on IRD interest.

TMNZ let’s a taxpayer apply provisional tax that was originally paid to the tax department on the date(s) it was originally due against their liability.

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

A taxpayer has up to 75 days from their terminal tax date for the 2020-21 income year to pay any underpaid provisional tax with TMNZ.


3. Using tax pool deposits as a line of credit


Alternative to

IRD’s temporary tax loss carry-back scheme.


Suitable for

Taxpayers who hold deposited funds in TMNZ tax pool in urgent need of cash.


Drawbacks of IRD’s offering

Under the temporary tax loss carry-back scheme, a taxpayer who expect to make a loss in either the 2019-2020 or 2020-2021 income year will be able to estimate that loss and use all (or a portion of it) to offset any profit made in the previous year.

This allows those who need cash urgently to receive a refund of any income tax paid in the previous year.

However, some taxpayers are nervous about using the regime as they are uncertain how the 2020-21 income year will play out.

There are consequences if they overestimate the loss they are carrying back and this results in tax payable in the previous profit year.

In a nutshell, someone will incur IRD interest all the way back to the first instalment date of the profit year.

This is because they have to file an estimate with IRD in order to use the scheme. That subsequently takes them out of the interest concession rules that apply for standard uplift taxpayers.


TMNZ’s solution

Tax pooling allows someone short on cash to temporarily withdraw deposits they hold in the pool.

A taxpayer receives from TMNZ an amount equal to their deposited funds (minus an upfront interest cost), while having the option to restore those deposits at their original deposit date(s) when their cashflow situation improves.

Unlike the temporary tax loss carry-back scheme, there is no need to be in a loss position to access funds.

The ability to stay within the standard uplift interest concession rules also remains intact as there is no requirement to file an estimate with IRD.

Someone needs to give consideration to their imputation credit account balance before withdrawing any tax pool deposits.

It’s also important to note that funds taken out of the pool switch from own to purchased funds.

That means to reinstate the deposit(s) at their original dates, a taxpayer must have paid back and transferred the core tax from the tax pool to their account at IRD within 75 days of their terminal tax date for that tax year.


About TMNZ

TMNZ operates with the blessing of IRD and under legislation set out in the Income Tax Act 2007 and Tax Administration Act 1994.

Not only are we New Zealand’s first and oldest tax pooling provider, it was our company founder, Ian Kuperus, who came up with the concept and worked with officials to set up a framework.

TMNZ has been creating a better tax environment for businesses since 2003.

For more information about tax pooling, please feel free to contact us.

 


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.


COVID-19 provisional tax interest remission: What you need to know

Updated 11 August 2020

Small- and medium-sized taxpayers may no longer have to pay interest if they underpay provisional tax as a result of miscalculating the impact COVID-19 has on their profitability for the 2020-21 income year.

However, while this concession is a major boon ahead of the 28 August 2020 payment date for those strapped for cash in the wake of the global pandemic, it is subject to meeting certain criteria.

Someone must be able to prove to IRD that any underpayment(s) that arise from getting their forecast wrong was due to an unforeseen change in circumstance that was out of their control – IRD calls this the ‘who would have thought that would happen?’ test – not human error, before the tax department will exercise its new discretionary power.

A taxpayer won't be able to benefit from this concession if they make no effort whatsoever to forecast their liability.

Background - how it will work

The provisional tax interest remission was part of the COVID-19 Response (Further Management Measures) Legislation Bill (No 2) that was passed under urgency in Parliament this week. Please refer to schedule 2 of the Bill.

It’s available to taxpayers who:

  • Use the standard uplift or estimation method to calculate their payments;
  • Have an income tax liability for the 2020-21 year of less than $1 million;
  • Are not using the temporary tax loss carry-back scheme; and
  • Their ability to make a reasonably accurate forecast of that year's income tax liability on one or more of their provisional tax instalment dates was significantly adversely affected by COVID-19.

Under proposed new section 183ABAC Tax Administration Act 1994, someone who meets the criteria above can ask IRD for a remission of any interest that has accrued before their terminal tax date on underpaid tax for the 2020-21 income year.

If the taxpayer asks for the relief as soon as practicable after filing their return for that year, IRD may agree to waive interest on any shortfalls if it is satisfied the provisional tax they paid was a fair reflection of how their business was performing at the time.

It applies for interest accrued on underpaid tax amounts between 31 March 2020 and someone’s terminal tax date for the 2020-21 income year (both dates inclusive).

Normal interest rules will apply for those who are not eligible for this concession. These will differ depending on whether a taxpayer uses the standard uplift or the estimation method to calculate their 2020-21 income year payments. Please be aware of that.

How does s183ABAC differ from s183ABAB?

Section 183ABAC of the Act deals with the remission of interest on underpaid provisional tax for the 2020-21 income tax year where the taxpayer could not forecast their tax liability because of COVID-19.

It addresses the difficulty in determining how much tax should be paid, particularly at the first and second instalment dates.  

Section 183ABAB – introduced earlier this year – deals with the remission of interest if COVID-19 prevented a taxpayer from making on time a tax payment that was due on or after 14 February 2020.

It addresses their ability to make the tax payment.

That distinction is important to note.

TMNZ’s thoughts

We welcome IRD’s decision to cut taxpayers still reeling from the impact of the pandemic a break for the upcoming year.

Many businesses don’t want to make their 2020-21 provisional tax payments based on an uplift calculation from a pre-COVID time. Being able to pay provisional tax based on how a business is expected to perform this year – without the seven percent interest consequence that comes with it if the forecast turns out to be incorrect – will offer cashflow benefits at a time when many folks are looking to recover, rebuild and get back on their feet.

Well done.

Kudos must also go to our friends at Chartered Accountants Australia and New Zealand. They were the ones who lobbied IRD for the concession. It would not have come to pass if it wasn’t for their work.

Who can apply for the remission?

IRD has made it clear this is not a free pass for everyone. They expect someone not impacted by COVID-19 to pay on time and in full.

Any underpaid provisional tax that arises as a result of a taxpayer miscalculating their forecast for the 2020-21 income year must be due to a ‘who-would-have-thought-that-would-happen?’ event. That’s how to interpret “significantly adversely impacted by COVID-19” in the context of s183ABAC.

For instance, the New Zealand border reopening in late January next year and those in the tourism sector experiencing a late upswing in profitability because of that would be classified as such an event. In that situation, IRD would agree to remitting the interest someone will incur on underpaid provisional tax at any instalment dates that were due and payable prior to this event happening.

However, someone who has the resources available to accurately forecast their liability is unlikely to get much sympathy if they get it wrong.

IRD says it will determine these 'who-would-have-thought-that-would-happen? events on a case-by-case basis. They plan to publish examples on their website to provide more clarity.

Someone is also encouraged to keep a record of any information that can justify why they made the payment they did at the time. This is important. They may request to see supporting documents when reviewing applications for relief.

Be warned: IRD does not want taxpayers abusing a high-trust concession. Expect them to act accordingly if they discover anyone is taking the you-know-what.

Other considerations

Here are a few other things to note about the provisional tax interest remission.

  • IRD’s ability to wipe interest is discretionary, not guaranteed. Whenever discretion is in the mix, inconsistencies can arise. For instance, TMNZ is seeing this in terms of how department staff is applying the interest remission rules in s183ABAB. Something similar may happen here.
  • Moreover, there is less chance of IRD waiving interest if a taxpayer significantly underpays provisional tax at the date of their final instalment than if they pay short at their earlier payment dates. That will certainly be the case for larger and more sophisticated taxpayers who are better able to forecast how their business is tracking. And it makes sense, too. The first instalment is due early in the income year when it can be difficult to tell how things will unfold. The second instalment is due about two-thirds of the way through. There’s still a chance something drastic could happen after this that impacts a person's ability to forecast their payment accurately. However, the date of the final instalment is typically a month after year-end. By this time, someone should have a reasonable expectation of their liability given they have completed their year.
  • A taxpayer is going to have to file their return for the 2020-21 income year before asking for relief. Logically, that makes sense as IRD calculates interest and penalties retrospectively. However, that poses a big risk – especially as IRD may turn around and say ‘no dice’. That would leave someone exposed to interest on the underpaid tax and potentially late payment penalties too. Interest and late payment penalties will be from the date(s) of underpayment. The question will be: Does a taxpayer have enough faith to trust IRD?
  • Whatever the case, we recommend you continue to use the standard uplift as the basis to calculate provisional tax payments for the 2020-21 income year. Why? The reason is simple. If IRD rejects an interest remission request, then interest on underpaid tax at instalment dates prior to the last one will be charged on the lesser of the standard uplift instalment amount or a third of the actual income tax liability. Interest at the date of the final provisional tax instalment will be charged on the remaining balance to settle the income tax liability for the year. Those who estimate provisional tax at any time during their year don’t enjoy this ‘lesser of’ protection. They will come badly unstuck if IRD says no to their request for relief and the income tax payable turns out to be MORE THAN the prior year’s result.

The role of tax pooling

For taxpayers wanting certainty of outcome when it comes to managing cashflow and provisional tax payments at this uncertain time – or those who do not meet the criteria to receive a remission of interest from IRD – tax pooling is the next best option.

That’s because acceptance is guaranteed, and no security or financial information is required.

We can offer payment flexibility and deferrals that are on a taxpayer’s terms. We can also eliminate late payment penalties and reduce the interest someone has to pay if IRD declines their request.

Yes, we charge a small interest cost to use our service.

However, this may be negligible. After all, we are a known quantity that can offer peace of mind and our payment arrangements are easier to set up.

Feel free to contact your TMNZ account manager if you have any questions about the provisional tax interest remission.

Disclaimer: This article is correct as at 11 August 2020. It is subject to change. TMNZ will update this article as and when it receives new information from IRDWe encourage readers to check this page regularly.


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Deadline approaching for non-COVID-19 taxpayers

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Options in the marketplace are available to help those NOT affected by COVID-19 pay their TMNZ arrangement for the 2019 tax year within the required legislative timeframe.

We are mentioning this as we know there will be taxpayers short on cash right now who unfortunately won't meet the criteria to receive the deadline extension announced by IRD last week.

The 75th day is coming

Someone has 75 days from their terminal tax date to pay the income tax they owe via TMNZ.

IRD says this standard rule applies if the taxpayer is not impacted by COVID-19.

As such, those with a 7 April 2020 terminal date must settle their Flexitax® or Tax Finance arrangements for the 2019 tax year by no later than 22 June 2020.

Legislation prevents TMNZ from assisting beyond this date. Please see sRP17B (4) Income Tax Act 2007.

The final date TMNZ can accept payment is 18 June 2020.

What happens if I don’t pay TMNZ by 22 June 2020?

Unpaid Flexitax® or Tax Finance balances will incur IRD interest (UOMI) and late payment penalties.

The department will charge UOMI and late payment penalties from the date the tax payment(s) were originally due. Someone will need to deal with them directly to get these remitted.

We encourage taxpayers to think about their options if they will struggle to pay their 2019 income tax arrangements with TMNZ by the legislative deadline.

There is a plethora of services in the marketplace.

Here are three of them.

Interface Financial Group

The Interface Financial Group offers an invoice discounting service. It provides money straight away to clients by purchasing your unpaid invoices.

It pays up to 90 percent of the invoice amount. The only cost is a discount fee it earns on the invoice(s) it purchases from a business.

Your customers then pay the full invoice amount to The Interface Financial Group on the due date.

The service can be used at the sole discretion of business owners and is provided on a use-it-as-you-need-it basis.

Spotcap

Spotcap provides unsecured business loans of up to $250,000 to small- and medium-sized businesses.

You can complete this process online. They make credit decisions within 24 hours.

Spotcap gives immediate access to a credit line (from $10,000 to $250,000) upon approval. You pay a drawdown fee once you make a withdrawal and will incur interest of the amount you draw down.

You create a business loan every time you draw down. The loan is repayable monthly (one to 12 months).

Lock Finance

Lock Finance offers several lending facilities to help with cashflow depending on a business’ situation.

These include debtor finance, factoring, working capital finance and trade finance.

Lock Finance tends to focus on a business’ overall position to assess security rather than serviceability.

TMNZ has no affiliation with Interface Financial Group, Spotcap and Lock Finance. We are not endorsing their services and do not receive any referral fees or commission from them. This information is provided only as a service to clients on options in the market. We encourage clients to do their own due diligence as we have done.


COVID-19: IRD extends tax pooling deadline

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Updated 19 June 2020

Anyone impacted by COVID-19 will have 365 days after their terminal tax date to settle 2019 income tax arrangements with TMNZ, subject to meeting certain criteria.

IRD has used its new discretionary powers in s6I Tax Administration Act 1994 to extend the legislative deadline after recognising the cashflow difficulties some taxpayers face in the wake of the global virus and the Government’s response to it.

It means those with a terminal tax date of 7 April 2020 now have until 7 April 2021 to satisfy their Flexitax® or Tax Finance arrangements for the 2019 tax year.

Normally they have just 75 days after their terminal tax date to pay.

For taxpayers with a different terminal tax date, the extension to settle 2019 income tax will apply if their 75th day fell during a period that was impacted by COVID-19.

That means those with 15 January 2020, 7 February 2020, 7 March 2020 and 7 April 2020 terminal tax dates can request extra time to pay.

TMNZ welcomes IRD’s decision.

We wish to thank officials at the department for recognising the impact COVID-19 is having on our clients in relation to settling their 2019 income tax obligations within the required timeframe, as well as engaging with us to come up with a solution.

Eligibility criteria

The extension is subject to a taxpayer completing an application form and meeting a couple of conditions.

Firstly, they must have experienced – or expect to experience – a significant decline in actual or forecast revenue due to COVID-19 between January 2020 and July 2020 that either:

  • Prevents them from satisfying their existing arrangement for the 2019 tax year with TMNZ within the normal legislative timeframe; or
  • Meant that prior to this extension, they were unable to enter into an arrangement for the 2019 tax year with TMNZ.

If someone has received the Government wage subsidy, then this will satisfy the requirement of a reduction in revenue due to COVID-19.

If they have not, they will need to confirm that, after meeting their on-going business expenditure, they DO NOT have any of the following immediately available to pay their tax obligation:

  • Cash reserves
  • Insurance proceeds
  • Banking facilities.

Secondly, a taxpayer must have their TMNZ arrangement for the 2019 tax year in place on or before 21 July 2020. Our recommendation is that you set this up as soon as you can.

Thirdly, they will need to supply a cashflow forecast (or other comparable information if they are a small business).

IRD is asking us to collect and check this forecast as it wants proof that the taxpayer requesting an extension will have the funds available to meet their liability within the new timeframe.

Someone must supply this forecast even if they received the wage subsidy.

Many clients and tax agents will be able to access this through their accounting software. If someone does not have a cashflow forecast template, here is one that IRD sends those wishing to enter into a payment plan.

Exception to the cashflow forecast criteria

If a taxpayer intends to settle their tax liability before 21 July 2020, they DO NOT need to provide a cashflow forecast.

Payment frequency

We CANNOT accept arrangements to delay the payment of all your outstanding tax until the last day.

IRD wants taxpayers to make regular payments towards their liability. These payments can be made weekly, fortnightly or monthly.

Please contact us if you have circumstances that will make this difficult.

We can vary arrangements part way through if required.

A taxpayer's final payment must be received no later than 365 days past their terminal tax date for the 2019 tax year.

TMNZ’s interest rates for extension arrangements are the same as they are for other transactions.

Key dates to note

The 365-day extension deadline will differ slightly for taxpayers with the terminal tax dates in bold. Please be mindful of this when completing the application form.

For those whose terminal tax date for the 2019 tax year is 15 January 2020, 365 days after this date is actually 14 January 2021.

This is because 2020 has an extra day due to being a leap year.

For those whose terminal tax date for the 2019 tax year is 7 February 2020, their actual 365th day is 9 February 2021.

There are two reasons for this.

The first is that 7 February 2021 falls on a Sunday. The second is Waitangi Day (6 February) is ‘Monday-ised’ to 8 February.

For those whose terminal tax date for the 2019 tax year is 7 March 2020, their 365th day is 9 March 2021.

This is because:

  • The due date for this 2019 terminal tax payment defaulted to 9 March 2020 as the seventh was on a Saturday this year; and
  • IRD has applied the 365-day extension from 9 March 2020.

The application process

You can find the extension application form here. Please complete and send this along with your cashflow forecast to support@tmnz.co.nz.

Someone can send us the completed application form immediately and provide the cashflow forecast in the next three weeks.

Don't hesitate to call

The process around this extension has been introduced at short notice, so please bear with us.

As always, if you have any questions, feel free to contact your TMNZ account manager or our customer support team. We're here to help.

Disclaimer: This article is correct as at 19 June 2020. It is subject to change. TMNZ will update this article as and when it receives new information from IRD regarding the extension of the 2019 tax pooling deadline. We encourage readers to check this page regularly.


Tax loss carry-back scheme: Important considerations

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Standard imputation (ICA), ownership continuity and grouping rules still apply under the new tax loss carry-back scheme, while anyone who overestimates their loss will face IRD interest (UOMI) from the date of their first provisional tax instalment for the previous year.

Moreover, company profits already paid out via shareholder-employee salaries or dividends are unable to be reversed to take advantage of the scheme.

A basic overview of the scheme

Under the temporary scheme, taxpayers who expect to make a loss in either the 2020 or 2021 tax year will be able to estimate that loss and use all (or a portion of it) to offset any profit made in the previous year.

This allows those who need cash urgently to receive a refund of any income tax paid in the previous year.

It applies to companies, trusts, and individuals (other than those deriving only PAYE income) and those that operate through partnerships and look-through companies.

The legislative reference is sIZ8 Income Tax Act 2007.

Here are some of the things you need to consider before electing to use the scheme.

The ICA rules

Be mindful that standard ICA rules apply as part of the tax loss carry-back.

That means in order to obtain a refund of income tax, a taxpayer must have an ICA credit balance at the end of the most recently ended tax year (i.e. 31 March 2020) that is at least equal to the refund amount.

Alternatively, they can complete an interim ICA return up to the date of their refund request.

Provisional tax deposits held in a tax pooling account that are refunded under the loss carry-back scheme will be subject to the imputation debit rules that normally apply for pooling.

Given the potential exposure to imputation penalty tax of 10 percent and UOMI, the timing of tax pooling refunds due to a loss being carried back should be considered on an ongoing basis to mitigate this risk. 

The results can be catastrophic if they’re not.

We strongly encourage you to contact us before you refund any balances from the pool.

Ownership continuity and grouping rules

The ownership continuity requirements that relate to the loss carry-forward provision, and the normal grouping rules, also apply under the tax loss carry-back scheme.

This means a company must have maintained at least 49 percent common ownership throughout the loss year and preceding profit year.

For entities part of a group, the group must have retained 66 percent common ownership throughout the loss year and the preceding year.

That said, there are provisions in the tax loss carry-back legislation that deal with part years in the ownership continuity period.

IRD has examples of this in its commentary for the COVID-19 Response (Taxation and Other Regulatory Urgent Measures) Bill.

Time bar rule

IRD can reassess both the loss year and the preceding profit year at the same time – even if the preceding profit year is time barred.

That is something to keep in mind.

Situations where the scheme cannot be used

A taxpayer must have taxable income in the previous year.

Given that, a company that has already paid out its profit via shareholder-employee salaries will not have any taxable income to which they can apply future losses they wish to carry back.

This is also the case if the taxpayer has already distributed its profits as a dividend or made a subvention payment.

Therefore, they cannot use the scheme.

Taxpayers who have ringfenced rental losses will not be able to carry back losses either.

It's the same with multi-rate PIEs. This is because they have a cash-out for losses that provides immediate tax relief in this situation.

Situations where it will offer limited benefit

A taxpayer can only carry back losses one year (e.g. from the 2021 tax year to the 2020 tax year).

As such, there will be situations where the scheme will only free up a small refund of income tax.

Example one

Tax year Taxable income
2019 Massive profit
2020 Modest profit
2021 Huge loss forecast

Someone can only carry back the huge forecast loss for 2021 to the extent of the taxable income in 2020. As you can see, this is considerably lower in comparison to the 2019 tax year.

This will result in a very small refund of tax under the scheme.

Example two

Tax year Taxable income
2019 Massive profit
2020 Small loss
2021 Huge loss forecast

Someone can only carry back the small loss from 2020 to the 2019 year. The huge forecast loss from 2021 cannot be utilised as part of the scheme.

Once again, this will result in a small refund of tax.

Here’s another thing to remember.

If the taxpayer is part of a wholly owned group of companies, the loss amount they can carry back is limited to the amount that cannot be offset against the profits within that group during the loss year. In other words, the loss must be used within the group first during the loss year.

UOMI ramifications

A taxpayer can re-estimate provisional tax in the previous year as many times as they like under the scheme. They can keep doing so up until the date they file their return for the loss year (or the date by which they must legally file this return if this is earlier).

However, re-estimating provisional tax means the UOMI rules in s120KB Tax Administration Act 1994 will apply.

That means if someone overestimates their tax loss carry-back for the loss year – resulting in tax to be paid later due to receiving a larger refund to which they were entitled – they will be liable to pay UOMI from the date of their first provisional tax instalment in the preceding profit year.

Interest will be charged on the difference between the income tax they owe for the profit year and the income tax they paid in that year.

The income tax they owe for the profit year is based on the original taxable income for that year, minus the actual loss from the loss year. The tax they paid in the profit year is based on the original taxable income for that year, minus the total loss year refund they initially received due to overestimating their loss.

The amount on which UOMI is charged will be split evenly across the number of provisional tax instalments payable for the profit year.

Section 183ABAB of the Act – which gives IRD the power to remit UOMI for taxpayers who cannot make tax payments after 14 February 2020 due to COVID-19 – will not be able to assist.

TMNZ can help reduce UOMI

However, someone who is incurring UOMI due to overestimating their tax loss carry-back can use TMNZ to reduce the interest cost by up to 30 percent on the additional tax payable if they are within 75 days of their terminal tax date for the profit year (or 60 days from the date IRD issues a notice of reassessment if the profit year is a closed income year).

Flexitax® allows them to apply backdated tax paid to IRD on the date it was originally due against their liability.

As such, IRD will treat the taxpayer as having paid on time once it processes this transaction, remitting any UOMI and late payment penalties incurred.

It’s a safety net for someone who has a ‘mare forecasting their loss.

It may pay to wait and see

For many taxpayers, the most recent tax year would have ended on 31 March 2020.

Up until the start of that month, when the impacts of COVID-19 really hit, everything was running smoothly. It’s quite likely their profitability was not significantly impacted.

But there’s a strong likelihood it will be during their 2021 tax year.

However, as it’s still early days in that year, having to estimate a loss to carry back to 2020 this far out is quite difficult.

Honestly, who really knows what the landscape will look like next month – let alone by 31 March 2021 – given the clouds of uncertainty lingering above the domestic and global economies in the wake of COVID-19?

The risk of incurring UOMI if they get it wrong means they may wish to err on the side of caution with their loss estimate and then re-estimate as the year progresses once the picture becomes clearer.

The other option is to hold off until later. That's what many appear to be doing at this stage given the low uptake.

Yet a downside of playing it safe or waiting a little longer is the taxpayer may not receive the full cashflow injection they are seeking right now.

Does their desperate need for immediate funds outweigh the potential UOMI consequences down the track, or can they afford to wait?

That’s something a taxpayer is going to need to weigh up before opting in.

Don't forget tax pool deposits

For those holding provisional tax deposits in TMNZ’s tax pool who want access to their payments now – but don’t yet have the confidence to file a loss carry-back – there is another option.

They can take a line of credit against their deposits, for interest rates below three percent. They also have the option of restoring those deposits at their original deposit dates once their cashflow situation improves.

However, there are a couple of things to note.

For starters, the ICA position needs to considered first as the debit rules for pooling apply in this situation as well since the transaction is treated as a sale of tax.

The tax must also be paid back and transferred to IRD within 75 days after the terminal tax date for that tax period.

Nonetheless, it's something else to think about if a taxpayer requires cash in the wake of COVID-19.

Summary

The above are some things of which to be aware when it comes to the tax loss carry-back scheme.

For business owners, this IS NOT tax advice. We recommend you speak with a tax specialist in the first instance about your particular situation. The legislation is quite complex.

You can find one of our premium accounting partners here.