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

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

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

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

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

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

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

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

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

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

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

How Tax Management NZ can help

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

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

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

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

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

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

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

Legislative deadlines do apply.

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