Small Business Cashflow Loan Scheme: Do your homework first
A former economist at one of New Zealand’s largest banks has a warning for someone considering the Small Business Cashflow Loan Scheme: It could limit your future borrowing capacity.
That’s because banks may decline lending to anyone who has this type of debt on their books, as IRD may have first collection rights as a creditor if the applicant's business goes belly-up.
An overview of the scheme
Under the Small Business Cashflow Loan Scheme, the Government is offering interest-free loans of up to $100,000 to cover operating costs such as rent, insurance, utilities and supplier payments to those with 50 or fewer fulltime staff.
IRD will administer the loans. New section 7AA Tax Administration Act 1994 gives them the power to do so.
To be eligible, an applicant must show they have suffered a 30 percent reduction in revenue (à la the wage subsidy) and prove their business is viable.
The scheme will provide $10,000 to every business, plus $1800 for every fulltime employee.
For instance, a sole trader can borrow up to $11,800.
A company with 50 fulltime employees will get the full $100,000. That comprises the base loan of $10,000 and $90,000 for its staff.
The loan will be for a maximum of five years, with repayments not due in the first two years.
If a business pays the loan within the first year, no interest will apply. An interest rate of three percent applies otherwise from the start date of the loan.
Those utilising the scheme will enter a legally binding arrangement with IRD. You can find the terms and conditions of the contract here.
As at 9am on 22 May 2020, $824.516 million worth of loans had been approved and distributed to 47,664 applicants.
The scheme is available until 12 June 2020.
The implications of an IRD loan
Ex-BNZ economist Tony Alexander, speaking as part of TMNZ’s first virtual roadshow earlier this month, was asked his thoughts on the Small Business Cashflow Loan Scheme.
He says it’s important to remember it is not free money.
Anyone borrowing money from IRD should do so only to cover uncertain cashflow fluctuations over the next 12 months.
However, he has a warning for those looking to use the scheme. That is: What will your bank say the next time you approach them for core financing?
“If you do borrow [from IRD], and then you go to your bank and say you want to borrow money, they’re going to be factoring in that new debt which you have got there, debt which I’m guessing will rank higher when it comes to closing down the firm if necessary than lending to the bank,” says Alexander.
“I figured that’s why [the Government] did it through the IRD because they would have first call on the company in a closed down situation in advance of the bank, but I can’t be sure of that.”
Does IRD have priority?
Interestingly, IRD has amended the definition of ‘tax’ in various sections of the Tax Administration Act 1994 to include these loans. So yes, that gives them the necessary collection powers.
However, what is not certain is if these loans are a priority debt that move to near the front of the queue in the way that PAYE does when a business enters into liquidation.
We’re hoping Richard Owen, who is the small and medium enterprises customer segment lead at IRD, can clarify this at our next virtual roadshow on 17 June.
You can register for this event here.
Other things to note about Small Business Cashflow Loan Scheme
Below are the important terms and conditions of the scheme to note.
IRD calls the shots
IRD can change the terms of the loan contract with 30 days’ notice. It can also assign the loan to another party.
And they can audit your application at any time.
Beware the consequences of defaulting
In the case of an ‘event of default’, then the interest rate jumps to 10 percent.
This comprises the three percent someone normally faces under the scheme, plus IRD’s underpayment interest rate. The latter is currently seven percent.
At a time where the Government has stamped out loansharking, 10 percent interest is quite draconian.
An event of default can include someone:
- Breaching or not complying with any undertaking they are required to under the agreement they have with IRD.
- Failing to make payments of the loan due to the dissolution, termination, disestablishment, de-registration or winding up of a company.
- Failing to make payments of the loan due to the appointment of a liquidator, statutory manager, administrator, receiver, bankruptcy official or similar officer in respect to a person or any of their assets.
- Ceasing to carry on the business or organisation for which the loan amount was provided.
- Making any statement or providing information that is untrue, inaccurate or misleading.
See clause 9.1 of the terms and conditions document for more information about an event of default.
You will enter a payment plan after 24 months
Anyone who fails to pay their loan back within two years will put on an IRD payment plan.
From the date of the 24th month to the final repayment date (i.e. the date falling five years after the loan is made available to someone), a taxpayer must make regular instalment payments of principal and interest, as notified by the department.
Any such instalment payments will be calculated by IRD to spread the amount of the required repayments over this repayment period.
Failing to pay an instalment amount will trigger default interest.
You must remain in New Zealand
An individual borrowing money from IRD as part of the Small Business Cashflow Loan Scheme has a requirement to stay in New Zealand (other than for temporary absences like holidays) until they pay back their loan.
You must notify IRD of any changes
Anyone using the Small Business Cashflow Loan Scheme has an obligation to tell IRD if their company or organisation ceases to exist as soon as possible.
It is important you consider this if you are in self-employment.
After all, if you choose to put your business on hold and move back into an employment role, it may trigger a requirement to repay the loan.
IRD can share your information
The contract terms give IRD broad powers to share personal information with other government departments as well as debt collectors and credit agencies.
Do your homework first
We encourage anyone thinking about using the Small Business Cashflow Loan Scheme to read the terms and conditions, so they know exactly what they’re getting themselves into.
Moreover, take heed of Alexander’s warning about the impact it may have on getting a bank loan later.
However, above all else, seek expert advice about your situation before signing up to anything.
IRD system issues affecting tax pooling
IRD is working to resolve the problem of its system incorrectly sending grace period letters to taxpayers flagged as using tax pooling.
However, they have fixed the issue which was seeing someone's GST refund being automatically applied to their provisional tax.
Here's what you need to know about both problems.
Plus, we also highlight some other system bugs impacting provisional taxpayers.
Grace period letters
Some taxpayers marked as using tax pooling to pay their income tax were receiving a letter notifying them that:
- They didn't make a payment on time; and
- IRD was giving them a grace period to pay before imposing late payment penalties.
This should not be happening.
We understand the cause of this issue is due to IRD's developers not fixing this problem as expected last year. They got diverted to other tasks before the change on which they were working made it through the test cycle and into production.
They are currently working to correct the accounts of those who have been impacted. This includes reversing the application of the grace period.
IRD will provide an update once it resolves the issue.
In the meantime, anyone who is using tax pooling can ignore any grace period letter they receive.
GST refunds applied to income tax
Despite someone being flagged in the system as having a tax pooling arrangement in place to pay their provisional tax, IRD was still applying their GST refund against their income tax.
Again, this should not be happening.
We understand the cause of this issue was IRD's system automatically ignoring the tax pooling indicator on someone's account.
That was part of a wider issue relating to GST refunds offset against provisional tax.
However, the problem has now been fixed and this will no longer happen.
That said, anyone whose GST refund was transferred to provisional tax prior to this fix will need to contact the department. They can do this by sending a message in myIR.
IRD will then reverse the transfer or refund any excess credits (where appropriate).
In case you missed it…
Below are the other system glitches impacting provisional taxpayers.
These updates from IRD are as at 16 April 2020. However, as far as we can tell, these are still ongoing issues.
Incorrect instalment dates
There is a problem causing some six-monthly GST filers to have three provisional tax instalments instead of two.
As a result, some taxpayers may have had interest (UOMI) charged incorrectly.
IRD is working on fixing this issue. It will provide an update once it finds a solution.
Incorrect UOMI and penalties on weekend due dates
There may be cases where late payment penalties and UOMI have been incorrectly charged if a provisional tax payment date fell on a weekend.
Again, the department is in the process of fixing this issue.
TMNZ will continue to keep you abreast of any IRD issue or update that pertains to tax pooling or provisional tax.
IRD adjusts UOMI rates
Someone will now pay the taxman less interest (UOMI) if they underpay their tax – but literally receive nowt if they overpay.
That’s the key takeaway after IRD announced it is adjusting its UOMI rates today.
They are lowering the interest they charge for underpaid tax from 8.35 percent to seven percent.
IRD’s credit interest also falls from 0.81 percent to zero percent.
That’s right – someone will get no financial compensation if they pay too much tax now.
IRD's new rates are effective from 8 May 2020.
How IRD sets its UOMI rates
The department calculates its underpayment interest by taking the floating first mortgage new customer rate and adding 250 basis points.
A recent legislative amendment means their credit UOMI rate is now based on the higher of:
- The 90-day bank bill, minus 100 basis points; or
- 0 percent.
Previously, they used just the 90-day bank bill, minus 100 basis points to set this rate.
Without the legislative amendment, taxpayers would have faced the awkward situation of having to pay interest to IRD if they overpaid their tax given the Reserve Bank of New Zealand's 90-day bank bill sits at just 0.26 percent.
UOMI remission guidance: IRD overlooks provisional tax scenario
Question: What is the amount on which IRD will remit interest (UOMI) at the date of the final provisional tax instalment if someone outside of safe harbour is unable to pay on time due to COVID-19?
The answer: We cannot say for certain as this is a scenario IRD has yet to address in its guidance (as of today’s date).
A taxpayer expecting their RIT for the year to be $60,000 or more must pay the remaining balance to settle their liability at the date of their final provisional tax instalment to avoid incurring UOMI.
For those with a 31 March balance date, 7 May 2020 is the final instalment for the 2020 tax year.
A problem that arises is someone might not know the actual RIT for the year by this date. In fact, it might be several months after the year-end before they determine this figure.
As paying the remaining balance on 7 May 2020 will therefore require some guesswork, there is a chance they could miscalculate and end up underpaying.
Example
A taxpayer expects to have RIT of $80,000 in the 2020 tax year and must pay the final balance on 7 May 2020 to avoid UOMI.
They believe the final balance to settle the RIT for the year will be $40,000.
However, because of COVID-19, they are unable to pay on 7 May 2020 and decide to seek assistance from IRD.
The department agrees to grant a remission of UOMI on the $40,000 for eight months under s183ABAB Tax Administration Act 1994.
However, when the taxpayer finalises their return eight months later, it turns out their 2020 RIT is $85,000.
This means they should have paid $45,000 on 7 May 2020 to settle the liability for this year.
All of which begs the question: How will the remission of UOMI work in this instance?
Below we look at three possible approaches IRD may take.
Option one
IRD might only agree to remit UOMI on the $40,000 because:
- This is what the taxpayer determined what was due and payable on 7 May 2020 under sRC10 (5) and (6) Income Tax Act 2007; and
- The taxpayer should have had a reasonable expectation of their final liability for the 2020 year given the 7 May 2020 instalment is due after their year-end.
Option two
IRD may take an approach where its UOMI remission at the date of the final instalment applies to the lesser of:
- The amount calculated by the taxpayer to the settle the liability ($40,000); or
- The amount that is required to settle the liability ($45,000).
In both options one and two, the taxpayer will liable for UOMI on the $5000 shortfall from 8 May 2020 until this is paid.
Option three
IRD might be generous and agree to remit UOMI on the final balance of $45,000.
If that’s the case, a taxpayer unable to pay on time due COVID-19 receives a major concession for their miscalculation.
Flexitax® is your safeguard
However, this is merely speculation at this stage.
Until IRD clarifies its position, a taxpayer may wish to consider entering a Flexitax® arrangement as a safeguard.
If the department agrees to a full UOMI remission, cool bananas. There’s no requirement to follow through with the arrangement.
If IRD only agrees to waive UOMI on the amount calculated by the taxpayer, then Flexitax® lets them significantly reduce the interest cost they face on any additional tax payable.
As always, we look forward to the department’s clarification.
Over to you, IRD.
COVID-19: How tax pooling can still help taxpayers
IRD may be taking a more flexible approach in terms of its interest (UOMI) remission for taxpayers grappling with the financial impact of COVID-19 – but any request for relief will still be at its discretion and on its terms.
As such, an IRD-approved tax pooling provider such as Tax Management NZ (TMNZ) can assist with provisional tax this month if someone:
- Misses out on a remission of UOMI.
- Wants greater payment flexibility to manage cashflow during this difficult time than what they'll receive if entering an IRD arrangement.
- Prefers not to deal with the taxman.
IRD: ‘If you say you can’t pay, we’ll believe you’
During a Chartered Accountants Australia and New Zealand webcast last month, IRD said they will take a taxpayer at their word if they tell them they cannot pay tax on time due to COVID-19 and accept most applications to waive UOMI if they are for no more than two years from the date the legislation was enacted (this being 25 March 2020).
Taxpayers DO NOT need to have exhausted all financing options before seeking assistance either.
This indicates IRD will be more flexible in its remission of UOMI. It was certainly a different tone to what was found in the general guidance document they issued last month.
And that’s not a bad thing for those reeling from the effects of COVID-19.
Our view
However, we believe the department's approach to the remission of UOMI will fall somewhere in the middle. It won't be as heavy-handed as their general guidance suggest, nor will it be a no-questioned-asked waiver for all.
As such, with provisional tax instalments due on 7 May and 28 May, we explain how tax pooling can be of assistance to taxpayers who are short on cash given the current economic climate.
Below we compare the service to IRD’s remission of UOMI.
Tax pooling offers more flexibility
With Flexitax®, taxpayers have the complete flexibility to pay what they want, when they want for up to 13 months.
While IRD is applying a high-trust approach in terms of applications and offering a remission of UOMI until 25 March 2022, it may still determine the type of payment arrangement it strikes with a taxpayer, the length of that arrangement and the date(s) by which someone must make payment(s) after it reviews someone's request.
There is also an expectation for anyone seeking relief to pay the tax they owe as soon as practicable. Remember, this is not a tax holiday. Only in extreme circumstances will someone be granted 22 months to pay.
If someone cannot honour their arrangement, they will need to contact IRD to renegotiate an extension or request a write-off. They will have to show they've made every possible effort to pay their liability by the agreed date. Whether someone is granted an extension or write-off will come down to IRD’s discretion.
Given that, even though TMNZ interest applies during any Flexitax® arrangement, some may find paying this negligible seeing as it gives them the freedom to manage cashflow by letting them make payments as and when it suits them, rather than having to meet the rigid terms of IRD’s payment arrangement.
A taxpayer has 75 days past their terminal tax to settle any 2020 income tax they owe with TMNZ. They only pay for the tax they require and can easily amend the arrangement to reflect this.
TMNZ’s interest cost can be significantly lower than the 8.35 percent IRD currently charges when someone misses a tax payment. It is very competitive in comparison to most other forms of credit or finance.
And with tax pooling able to eliminate late payment penalties, this makes us the next best option for anyone wanting the flexibility to manage their cashflow.
Tax pooling is easier to arrange
Someone can complete a Flexitax® request in less than five minutes by phoning TMNZ or via their online dashboard. If emailing us, we can have the arrangement ready to go within five hours of receiving someone’s correspondence.
It is also light touch in terms of organising. After all, approval is guaranteed, and no security or financial information is required.
The only thing TMNZ needs is a taxpayer’s IRD number.
Compare that to IRD.
A taxpayer applying for a remission of UOMI will require some financial documentation before they make their submission. While IRD may not ask for this information in all situations – they say it will only be in cases of serious hardship where someone is requesting a write-off of the tax they owe– it’s important to have it ready just in case.
IRD will not finalise and approve anything until it completes a review of the application. That can take three working days or more.
The department is also experiencing unprecedented query volumes right now due to COVID-19, so this may mean getting a response takes longer.
Tax pooling is your safety net
We encourage those seeking IRD relief to enter a Flexitax® request just to be on the safe side.
That’s because there are no guarantees IRD will accept someone’s application for UOMI remission. Again, discretion is key.
If the department accepts the request for relief, then great. There’s no obligation to complete the arrangement.
On the other hand, if IRD declines someone’s request for a remittance of UOMI, a taxpayer can rest safe in the knowledge that they have a way to defer their upcoming 2020 provisional tax payment until June next year, while eliminating late payment penalties and reducing their interest cost.
Please contact TMNZ today if you wish to know more about Flexitax®.
Harrison Grierson mitigates provisional tax risk
For Matthew Fleming, provisional tax is risky business as it requires a degree of crystal-ball gazing and guesswork.
However, he chooses to mitigate that risk by depositing these payments into Tax Management NZ’s tax pool account.
It's a “no-brainer” because it gives him a better return if he overpays provisional tax and reduces his interest and late payment penalty costs if he underpays.
More about Matthew Fleming
Matthew is the chief financial officer at Harrison Grierson, one of New Zealand’s leading engineering and design consultancies.
It has offices throughout Aotearoa and predominately provides services locally, with more than 350 staff on the books.
Remarkably, the firm is blowing out 135 candles this year. No-one stands the test of time for that long if they ain’t good at what they do.
And Harrison Grierson is good at what it does. A quick peruse of the significant projects is has been associated with during its lifetime is a testament to that.
Provisional tax is 'difficult to predict'
However, like most businesses, it is not immune to the problems provisional tax poses.
Matthew admits calculating the amount of income tax Harrison Grierson must pay IRD requires guesswork as its cashflow is up and down at certain times.
He knows the lay of the land during the first quarter – but the rest of the year can go either way.
“It’s hard enough to try and guess next month’s results, but when you’re having to guesstimate your final year’s tax liability accurately, [it] does take a certain degree of crystal-ball gazing,” says Matthew.
“We try to project our income and where our costs are going to be and having to pay tax on that sort of basis is a little bit of a risk.”
Even more so when one considers the taxman’s wide interest spread. They charge 8.35 percent if someone underpays provisional tax and pay just 0.81 percent if they overpay.
In other words, provisional tax is difficult to get right and very expensive when someone gets it wrong.
How Matthew manages that risk
Matthew chooses to deposit Harrison Grierson's provisional tax payments into TMNZ's tax pool.
It's an account operated by an IRD-approved tax pooling provider that allows taxpayers to combine their payments. The overpayments from some can then be used to offset the underpayments by others.
TMNZ's tax pool account sits at IRD and is overseen by an independent trustee.
Harrison Grierson keeps its date-stamped tax deposits in this account until Matthew confirms its liability for the year. He then arranges for the transfer of these deposits to the firm's own IRD account to satisfy what they owe.
If they have surplus tax remaining, he can earn additional interest by selling this to someone who has underpaid. (This is subject to market demand, which has been severely impacted by the COVID-19 pandemic.)
Conversely, if not enough tax has been paid, Matthew can reduce the IRD interest cost and eliminate any late payment penalties Harrison Grierson faces through purchasing the tax they require from another taxpayer and applying it against the company’s own liability when he arranges their transfers from the pool.
Matthew: 'TMNZ makes provisional tax easier'
Matthew is a big proponent of the benefit TMNZ delivers when his provisional tax calculations go askew.
“[Tax pooling’s] such a great service in terms of advantaging taxpayers when they are trying to estimate their liabilities and are struggling with it,” he says.
“The ability to get a return when you have overpaid and the ability not to pay such punitive penalty rates when you have underpaid makes it a no-brainer.”
As someone who is having to estimate revenue and costs a lot, Matthew finds it useful that tax pooling gives him the flexibility and control to make payments “as we see fit” based on how the financial year is unfolding, without any considerable downside.
He also likes that he can access refunds faster – and without having to file a return. TMNZ makes it simple for him to manage the payments of the different entities belonging to Harrison Grierson as well.
Matthew recommends tax pooling to other businesses, particularly those with seasonal or volatile income.
“What makes Tax Management NZ an easy choice is it makes the whole provisional tax regime easier to deal with.”
Watch Matthew's interview below:
COVID-19: Additional tax relief announced
IRD will have the flexibility to change statutory tax deadlines as part of new measures announced to provide relief for taxpayers during the COVID-19 pandemic.
Plans are also afoot to introduce a temporary tax loss carry-back scheme and relax the tax loss continuity rules.
Today’s announcement by the Government recognises taxpayers require more assistance during what is proving to be a financially trying time.
It follows the tax relief measures they unveiled last month.
The Government plans to introduce legislation containing these changes during the week beginning 27 April.
Detail about the new measures is light at this stage. IRD is not answering specific questions as they’re currently engaging with the wider tax community to determine how things will work.
Nonetheless, below is a summary of what we currently know about these new tax measures.
Giving IRD the power to change deadlines
IRD will have greater flexibility to temporarily change statutory tax dates, timeframes and procedural requirements for businesses and individuals impacted by COVID-19.
This discretionary power will be introduced via an amendment to the Tax Administration Act 1994.
While IRD will publish further guidance in the coming weeks following consultation with tax advisors, this may enable them to extend the deadlines for filing tax returns and paying provisional and terminal tax.
At this stage, the power will apply for a period of 18 months.
Temporary tax loss carry-back scheme
This will allow a taxpayer expecting to make a loss in either the 2020 or 2021 tax year to estimate that loss and use it to offset profit in the previous year.
They will also receive a refund of the tax paid in the previous profitable year.
A taxpayer will be able to cash out all or some of their losses in the 2020 or 2021 tax year. Under current rules, they can only carry them forward to a year when they make a profit.
They will have the option of re-estimating their provisional tax after the date of their final instalment if they require additional time to work out any estimated loss for the 2021 tax year.
IRD will be consulting with tax advisors to ensure the law and administrative guidance are clear.
Please note the Government is also considering a permanent loss carry-back scheme. It would apply from the 2022 tax year onward.
IRD says there will be public consultation about this during the second half of 2020.
Relaxing the tax loss continuity rules
Currently, a company cannot keep its tax losses if it has more than a 51 percent change in ownership.
However, the introduction of a ‘same or similar business’ test will mean they can and help make businesses seeking investment to keep afloat during the COVID-19 pandemic more appealing to investors, thus improving their access to capital.
IRD says the criteria which must be met to satisfy this requirement is modelled on Australia’s rules. This means a company must continue in the same or a similar manner it did before any change in ownership.
Again, IRD is engaging with the tax community to ensure the law is clear.
The Government intends to pass legislation relaxing the tax loss continuity rules before the end of March 2021.
They will apply for the 2021 tax year onward.
More information
You can find out more about today’s announcement by the Government via the links below.
- COVID-19 (novel coronavirus) – tax changes to support businesses
- Supporting small and medium sized enterprises during the COVID-19 crisis
- Government backs business through COVID-19
TMNZ will continue to update you with any new tax developments relating to COVID-19.
Latest updates + insights on COVID-19 UOMI concession
Taxpayers physically unable to pay their tax on time due to COVID-19
can also apply to have IRD interest (UOMI) remitted.
The COVID-19 Response (Taxation and Social Assistance Urgent Measures) Bill – which contains several other tax measures – was passed through all its stages under urgency in Parliament yesterday.
The commentary for the Bill clarifies when IRD can waive UOMI due to the impact of COVID-19 under new section 183ABAB of the Tax Administration Act 1994.
“This section would allow [IRD] to remit [UOMI] if a taxpayer’s ability to make a tax payment on time is significantly adversely affected by an outbreak of COVID-19,” it reads.
“This would include both where a taxpayer has been physically unable to make a payment on time, for example, because they have been quarantined, and where a taxpayer lacks the financial means to make a payment on time because of the economic impacts of COVID-19.”
It's the “physically unable to make payment on time” part in the commentary that piques our interest.
After all, the general assumption was the concession was only available to someone feeling the financial ramifications of COVID-19.
Nonetheless, it's logical to have something that caters to those who physically cannot make a payment due to the current situation.
What ‘physically unable to pay’ means
We are seeking clarification from IRD regarding what constitutes
being physically unable to make a payment on time due to COVID-19.
Our view is this will only apply to a handful of taxpayers.
For instance, take a person with no internet access or reliable phone service who lives in a remote rural area. They mightn't be able to pay at their nearest bank because the branch is closed or operating on reduced hours due to the Level 4 lockdown. In this instance, they may be eligible for remittance of UOMI.
Someone who has caught COVID-19 and is so sick they cannot physically make payment by any means may also qualify.
However, anyone in self-isolation who can pay electronically will probably be out of luck.
Of course, that's provided they don't meet the financial impact criteria (keep reading).
Meanwhile…
The commentary also confirms IRD will only waive UOMI once a taxpayer pays the core tax they owe.
To receive a remittance of UOMI, the taxpayer must make a request to the Commissioner.
They must satisfy the Commissioner that they both sought this relief and made their payment “as soon as practicable” to qualify.
The COVID-19 UOMI waiver explained
IRD may remit UOMI on tax due after 14 February 2020 if someone cannot pay on time due to COVID-19.
It applies to all tax payments such as income tax, PAYE and GST and other payments (e.g. Working for Families) where they charge UOMI.
IRD is developing guidance on when a taxpayer will be eligible for UOMI to be waived.
Initially, they said someone must show at least a 30 percent reduction in revenue for the same period 12 months earlier and have exhausted all options to support themselves financially.
But like everything right now, that may be subject to change.
The UOMI concession will apply for two years after the enactment date of the Bill.
However, there is a provision in the legislation to extend it by an Order in Council.
Discounted interest rate of 3.95 percent for forestry and tourism
TMNZ is offering a special rate of 3.95 percent for cash-strapped businesses in the forestry and tourism industries who require more time to pay income tax due to coronavirus.
The offer applies for 2020 provisional tax, as well as terminal tax payments relating to the 2019 tax year.
We know that paying provisional or terminal tax will not be top of mind right during this difficult and uncertain period. Managing cashflow until business conditions improve will be much more important.
As an IRD-approved tax pooling provider, TMNZ can offer respite from having to meet IRD's demand for income tax payments by providing more time to pay.
Taxpayers need not worry about incurring IRD interest of 8.35 percent or late payment penalties when using our service. They only pay our interest cost.
When do I have to pay?
For those with 2019 terminal tax obligations, we can extend the time for payment by 75 days from their terminal tax date. That means someone with a 7 April terminal tax date has until mid-June to pay.
Those struggling with 2020 provisional tax obligations would not have to pay until mid-June next year.
We recommend they hold off paying provisional tax until they know what their 2020 liability is likely to be. They can then purchase tax to meet their actual liability, rather than having to pay based on an uplift of prior year results.
Things to know about tax pooling
- TMNZ is approved by and registered with IRD and operates under legislation found in the Income Tax Act 2007 and Tax Administration Act 1994. TMNZ has been operating in New Zealand since 2003.
- Any payment made to TMNZ is made into a bank account administered by an independent trustee, Guardian Trust. Guardian Trust also oversees TMNZ's account at IRD.
- There is no requirement to provide any security or financial information to use our service.
- TMNZ cannot assist with GST or PAYE, unless there has been a reassessment. It’s important you stay on top of these tax obligations during this time. Talk with your advisor and IRD if you are having difficulty meeting these payments.
How to take up the offer
If you want to take up this offer, please email support@tmnz.co.nz or call us on 0800 829 888.
Feel free share and discuss this with others in the forestry and tourism industries.
Provisional tax relief during tough times
As businesses look to conserve cash in response to drought, flooding or coronavirus, there's an IRD-approved way to defer payment of their 2020 provisional tax until June next year.
Tax pooling lets taxpayers pay provisional tax at a time that suits their business, without facing interest and late payment penalties from the taxman.
Why might this be useful?
For most businesses, provisional tax will be calculated at 105 percent of the preceding year’s income tax liability.
But with recent adverse weather events in some parts of New Zealand, profitability may in some cases be less than forecast and some will not wish to pay based on this calculation. Others may also wish to hold on to funds to manage their cashflow at this uncertain time.
How tax pooling helps
A commercial tax pooling provider such as Tax Management NZ can offer some respite.
It allows someone to pay provisional tax at a time that suits their business. You will only have to pay what you owe IRD, not some amount calculated by reference to prior years which may be well in excess of your 2020 liability.
Using a tax pooling provider means those due to pay provisional tax on 28 February, 28 March or 7 May 2020 would have until 21 June 2021 to pay.
There is some interest to pay when using the service, but this is much cheaper compared to what IRD currently charges (check latest UOMI rates here) when a tax payment is missed or underpaid. (Correct at March 2023)
Things to know about tax pooling
- Tax pooling providers are approved by and registered with IRD and operate under legislation found in the Income Tax Act 2007 and Tax Administration Act 1994. The service has been operating in New Zealand since 2003.
- Any payment made to a tax pooling provider is made into a bank account administered by an independent trustee. This independent trustee also oversees a tax pooling provider’s account at IRD.
- There is no requirement to provide any security or financial information to use the service.
- Tax pooling cannot assist with GST or PAYE. It’s important to stay on top of these tax obligations during this time.
How tax pooling works
Say you have a provisional tax payment of $30,000 due in March 2023. With the uncertainty given recent events, you would rather not pay this right now if it can be avoided.
If you let TMNZ know about your position, we can make a tax deposit of $30,000 into our IRD account on 28 March 2020 on your behalf. This deposit is date stamped as at the date that it is made.
TMNZ will also tell IRD you are using tax pooling to pay your tax and IRD will enter a note in its system telling its debt collection team not to pursue the outstanding payment.
Once you file the tax return and know the liability for the year, you pay the tax pooling provider. This payment must be settled before your terminal tax date. Your payment includes the core tax of $30,000 plus the provider’s interest cost. The cost to defer $30,000 for 15 months is $2151.
If it turns out the actual liability for the year is less than the date-stamped deposit made on your behalf, don’t worry. You only pay for the tax you require, and the provider’s interest will be recalculated to reflect this.
Upon receiving your payment, the tax pooling provider transfers the deposit it is holding on your behalf from its IRD account to your IRD account. IRD will treat it as a payment made on time by you and will wipe any interest and late payment penalties they may have put on your account.
We recommend you speak with your accountant or tax adviser about tax pooling if you have any questions.