Coffee with Ann from Q2 Accountants
Have you ever wanted to sit down with an accountant and discuss topics related to business and provisional tax in depth? We were given the opportunity to do just that with Ann Cooper Smith, the Founder & Chief Executive of Q2 Accountants.
If you don't know who Ann is, she is a chartered accountant with 30 years experience in the public sector. The combination of her personal experience and passion for seeing businesses thrive are what give her a personalised approach to the questions we asked. A handful of those questions are below:
- What are Q2 trying to achieve for its customers?
- What should a business look for in an accountant?
- How does tax pooling provide solutions for your clients?
You will hear how Ann has learned how to use tax pooling creatively for her clients so they can further invest in their businesses while paying their provisional tax.
Take some time today to watch this video as it will give you some framework on how success can be achieved through smart planning.
First year of trading and provisional tax
This is a question we receive a lot. In fact, there is certainly a lot of confusion out there.
As most know, their first year of trading is not tax-free. However, when income tax is due and payable depends on a taxpayer’s residual income tax (RIT) for the year and if they are a ‘new provisional taxpayer’.
So, with that in mind, we explain below how the provisional tax rules work for the 2018 tax year onwards.
First year of trading: RIT is less than $60,000
Any income tax due for the year is due on your terminal tax date.
Interest will apply from this date if a taxpayer does not pay by then.
However, if the RIT is more than $5000 in their first year of trading, they will be a provisional taxpayer for the following year.
First year of trading: RIT is $60,000 or more
IRD may charge interest if you fall into the ‘new provisional taxpayer’ category.
The new provisional taxpayer criteria are different for individuals and companies/trusts.
Individuals are a new provisional taxpayer if:
- Their RIT for that tax year is $60,000 or more
- Their RIT in each of the four previous tax years was $5000 or less; and
- They stopped receiving income from employment and start to receive income from a taxable activity during that tax year.
Companies/trusts are a new provisional taxpayer if:
- Their RIT for that tax year is $60,000 or more
- They did not receive taxable income from a taxable activity in any of the four previous years; and
- They started receiving income from a taxable activity during that tax year.
Please take note the different criteria for individuals and companies/trusts. This catches taxpayers out.
It is important to mention the term ‘taxable activity’ has the same meaning as it does in section 6 Goods and Services Tax Act 1985. However, for the purposes of provisional tax, the exclusion in the Act pertaining to GST-exempt supplies does not apply.
As such, determining if you are a new provisional taxpayer can be tricky in some instances.
From what instalment(s) will IRD charge interest for new provisional taxpayers?
IRD may charge interest (see the current rate here) on the number of provisional tax payments a taxpayer could have made during the first year of trading if you meet the new provisional taxpayer criteria.
Of course, that number depends on the date on which their business starts trading.
For someone with a 31 March balance date, refer to the table below.
| If a taxpayer’s first year of trading starts… | Then the number of provisional tax instalments payable is… |
| Before 29 July | Three (28 Aug, 15 Jan and 7 May) |
| On/after 29 July but before 16 December | Two (15 Jan and 7 May) |
| On 16 December or any time after that | One (7 May) |
These dates will differ if your balance date isn’t 31 March or you file GST returns on a six-monthly basis.
The amount due at each provisional tax instalment
So, what happens if you meet the new provisional taxpayer criteria in your first year of trading?
Well, put simply, IRD will divide your RIT for the year by the number of instalments you were liable to pay per the table above.
For instance, say your business starts trading on 1 October and your RIT for the year was $69,000.
IRD will charge interest from two provisional tax dates: 15 January and 7 May. The amount on which interest will accrue at each date will be $34,500.
On the positive side, late payment penalties will not apply.
Reducing exposure to IRD interest
Taxpayers may wish to make provisional tax payments in their first year of trading to mitigate their exposure to IRD interest if they expect their RIT is going to be $60,000 or more.
If they are an individual or a partner in a partnership and meet certain criteria, they may also get an early payment discount of 6.7 percent on these payments.
TMNZ’s Flexitax lets you reduce the IRD interest cost on the tax owing by a significant amount.
This is done by applying surplus tax paid to IRD on the date it was originally due against your liability. IRD treats this as if you paid on time, eliminating any interest and late payment penalties incurred.
This article has been written in general terms only. You should not rely upon this to provide specific information without also obtaining appropriate professional advice after detailed examination of your situation.
Prodigy Hair Industry cuts tax stress
Krystle Walker from Prodigy Hair Industry loves cutting and styling hair. She does not love provisional tax.
That’s why she utilises the service of TMNZ. They cut away the stress this causes her so she can focus on running and improving her salon.
But more on that in the coming paragraphs. First, some background information.
The Prodigy Hair Industry story
Krystle is the owner and manager of Prodigy Hair Industry. It's in Upper Hutt, a city about 30 minutes outside of Wellington.
She has been plying her trade as a hairdresser for 12 years. Four of those have been at Prodigy Hair Industry.
It’s a stylish set-up she’s got on Fergusson Drive. (Yours Truly loved the décor.)
Things are humming nicely at Prodigy Hair Industry too. Seven staff on the books and a good customer base are a testament to that.
The challenges of being a business owner
Krystle is still wearing her training wheels in term of running her own business.
As she is discovering, transitioning from employee to employer is not without its challenges. There are wages to pay and hair products to purchase, among other things. Cashflow is a biggie.
Provisional tax is another challenge.
Krystle admits she is not a tax geek. Without being disrespectful, you get the sense the intricacies of tax probably do her head in. In fact, in an ideal world it would probably be something she would not have to concern herself with.
But alas, this is not an ideal world. She knows there is no escaping the clutches of the taxman. Falling out with IRD has serious repercussions too.
Taking care of provisional tax so she can take care of business
Krystle avoids any such precarious situations with TMNZ.
Her provisional tax payment plan means her tax is taken care of. She makes payments when her business cashflow permits and TMNZ applies these to the correct tax dates.
No need to worry about late payment penalties. There is interest to pay. However, this is much lower than the 8.22 percent IRD currently charges when someone doesn't pay tax on time.
“It does reduce the stress month to month. Knowing that you have got my back, I don’t have to worry about that,” she says.
It allows Krystle to get on with doing what she does best – cutting and styling hair and making sure Prodigy Hair Industry is satisfying its customers’ needs.
“I can put 100 percent into the business and my staff.”
The concept of paying provisional tax through TMNZ was about as familiar as the Klingon dialect when her accountant first broached the idea.
But after hearing how it operates with the blessing of IRD, Krystle says it was too good to pass up.
Now she has no qualms about recommending TMNZ to others occupying a similar waka to Prodigy Hair Industry.
“It’s great, especially for small business owners.
“It just gives me the confidence with my day-to-day cashflow.”
Watch the video below to hear from Krystal about how tax pooling has provided her freedom to focus on her business, not provisional tax.
TMNZ is New Zealand’s first and largest tax pooling provider. It offers provisional tax payment plans for business of all sizes.
Long delays expected for tax pooling transfers
IRD is taking longer to process
tax pooling transfers for the 2018 tax year.
They advise they are not processing these automatically as their system is not remitting interest and late payment penalties for taxpayers using tax pooling.
As such, they are flagging these accounts so their tax pooling team can edit them manually.
IRD is looking at increasing resourcing to improve processing speed. We are expecting them to be up to date with their tax pooling transfers by the end of June.
However, it may take longer due to the volume of transfers at this time of year.
We understand this only impacts the 2018 tax year and the process should be working better in future years.
In the meantime, tell clients
not to panic if they enquire about what’s happening. Let them know this is due
to an IRD processing issue and has nothing to do with TMNZ.
What if a taxpayer’s myIR is showing tax pooling transfers?
It appears some tax pooling
transfers were processed automatically before IRD was able to identify the
system fault.
This means there will be taxpayer myIR statements showing tax pooling transfers – but displaying incorrect interest and late payment penalty calculations.
If this applies to you or your
clients, please send a secure message to IRD. They can notify their tax pooling
team to flag the taxpayer account.
Issues with GST
Clients using tax pooling are also experiencing some teething problems with GST.
These include:
- GST filing issues where there is an outstanding tax liability. A solution to this is to enter $0.01 as the payment of income tax until IRD resolves the issue.
- Some clients are noticing IRD is holding up their GST refunds. This should not be happening as IRD have loaded a tax pooling indicator for all tax pooling clients. If this is affecting you or your clients, please let us know. We will contact IRD on your behalf.
But wait... there's more
Do not worry if you receive correspondence from IRD’s debt collection
team if you are using tax pooling.
This is a system error and should not be happening as we provide a list to IRD of taxpayers using tax pooling.
IRD is supposed to flag these accounts so their debt collection staff know not to actively chase them for any outstanding tax.
We will keep you abreast of any updates we receive from IRD about tax pooling transfers and any other issues.
Feel free to contact us if you have any questions.
2018 income tax arrangements: Options as final TMNZ deadline looms
The final payment date for taxpayers with a 7 April terminal tax date to pay their 2018 income tax arrangement via TMNZ is 18 June 2019.
Legislation prevents TMNZ from helping beyond 75 days after a taxpayer’s terminal tax date.
Unpaid Flexitax® or Tax Finance balances will incur IRD interest and late payment penalties. IRD will charge interest and late payment penalties from the date the tax payment(s) were originally due.
2018 income tax: What are my options?
Below are three options for clients if paying their 2018 income tax arrangement with TMNZ by the deadline is going to be a push.
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.
Further information:
Visit www.interfacefinancial.co.nz
or phone 0800 438 434 to talk to them directly.
Spotcap
Spotcap provides unsecured business loans of up to $250,000
to small- and medium-sized businesses.
You can complete this process online. Credit decisions are
made 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).
Further information: Visit www.spotcap.co.nz or phone 0800 444 540 to talk to them directly.
Lock Finance
Lock Finance provides 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.
Further information:
Visit www.lockfinance.co.nz or phone
0800 275 5625 to talk with them directly.
Don't leave 2018 income tax arrangements to the last minute
This is just a snapshot of the plethora of services that exist in the marketplace.
We encourage clients to think about their options if they are not going to be able to meet the deadline to pay their 2018 income tax arrangements with TMNZ.
TMNZ has no affiliation with The 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.
Cashflow survival: Dealing with terminal, provisional tax
The months of April and May can really tax your cashflow.
Let me explain.
On 7 April, IRD expects you to pay terminal tax for the 2018 income year.
Terminal tax means a taxpayer did not pay enough provisional tax for the previous year. As such, they need to square up the difference.
To make matters worse, IRD may also be applying interest of 8.22 percent to this underpayment.
A month later, IRD will ask for more tax to be paid. This time it will be a taxpayer’s final instalment of provisional tax for the 2019 tax year.
So not one income tax payment, but potentially two. It’s hardy ideal, is it?
The cashflow challenges presented by this tax double-whammy can be a worry.
But don’t fret. Keep calm and cool. Here’s what you can do to survive the taxing months of April and May.
Don’t let the 7 April terminal tax become, er, terminal
Deal with the terminal tax first as its the oldest tax debt.
If you do not do so by 7 April, late payment penalties will kick in. You will also register a blip on the radar of IRD’s debt collection team.
That’s the last thing you want.
What if IRD is already charging interest on the terminal tax due?
You can make significant savings by paying through an approved tax pooling intermediary.
They do this by applying surplus tax paid to IRD on the date it was originally due against your liability. IRD treats this as if you paid on time, eliminating any interest and late payment penalties incurred.
They also offer an additional 75 days past your terminal tax date to settle your 2018 terminal tax.
Review your 2019 year
For many, their financial year ended on 31 March. The 7 May instalment of provisional tax is the final payment for the 2019 tax year.
Given this, you will have a rough idea if you have overpaid or underpaid income tax. Review how your business performed and adjust your payment accordingly.
After all, there is no point paying more tax than you need to, right?
Manage cashflow by paying 7 May prov. tax at a time that suits you
According to Xero’s 2018 Small Business Insights, only 42.8 percent of small New Zealand businesses were cashflow positive in May. That’s not as bad as January, but it can still be a difficult time for some.
If paying provisional tax is likely to trigger a cashflow squeeze, tax pooling can offer some payment flexibility.
It gives you the option of:
- Paying provisional in instalments.
- Deferring the full payment to a time in the future that better suits your cashflow.
Both payment plans reduce IRD interest costs and eliminate late payment penalties.
Don’t forget
As always, make sure you have a chinwag with your accountant. The sooner, the better.
A good accountant can help you plot a course of attack and recommend solutions which work best for your business.
So, there you have it. A few pointers on what to do to ensure April and May do not tax your cashflow.
TMNZ is New Zealand’s largest tax pooling provider. For more information on how it can assist with paying provisional and terminal tax, check out our FAQs. Alternatively, phone 0800 829 888 or email our Client Services team if you have any further questions.
New provisional tax calculator
tmnz tax calculator introduction from Tax Management NZ on Vimeo.
Simplifying provisional tax is something we are always working on. Our new provisional tax calculator helps you by removing the time and strain of calculating your provisional tax payments.
Update: See below our live calculator walkthrough
Key developments
- This is a new tool to calculate provisional and terminal tax liabilities. As we detail below, you just need a few details to work out what your provisional tax payments are.
- We help you choose the best time to file. Toggle potential tax filing dates to see if there's an impact on your tax bill.
- One step payment arrangements. Once you know the liability, you can set up a payment plan with Flexitax®.
The information you need to use the provisional tax calculator
All that you require is:
- Your IRD number
- Your residual income tax (RIT) for your last two tax years, the dates the income tax returns for those years were filed and the expected/final RIT for the current year.
How to calculate your payments
To use our provisional tax calculator, log in to your TMNZ dashboard. If you have not already done so, you can register for free.
Give us feedback
You can do this by using our feedback widget in the dashboard.
We value all feedback and take it into consideration when planning enhancements and new developments.
Watch the demo: See how it works with examples