Image: 15 January provisional tax

Don't let 15 January provisional tax cause stress

Image: 15 January provisional tax and cashflow.

Paying 15 January provisional tax can be stressful and a pain in the derrière for many businesses – but it doesn’t have to be.

There is an IRD-approved service that allows taxpayers to make this payment when it suits them.

To understand why this might appeal, one must understand why 15 January provisional tax can be problematic.

For starters, let’s look at the timing of this payment. It is due when folks are enjoying the beach, BBQs, the bach or the boat. As the weather gets warmer, business activity for some chills during at this time of the year.

And while the current interest concession rules for taxpayers using the standard uplift method to calculate their provisional tax payments means they now have greater certainty over the amount due, this concession fails to recognise one thing that may be an issue for some during the Christmas-early New Year period: Cashflow.

Xero’s small business insights are telling. Only 39 percent of respondents were cashflow positive in January 2019. Moreover, invoices were also paid on average almost 11 days late during that month.

For some, the Christmas-early New Year period may mean six to eight weeks of no money coming in.

Only IRD can be so cruel to have provisional tax due on 15 January – and then flog a taxpayer with its interest (currently 8.35 percent) and late payment penalties if they fail to pay on time.

Pay 15 January provisional tax when it suits you

An IRD-approved tax pooling provider such as TMNZ offers provisional taxpayers payment flexibility, without having to worry about IRD interest and late payment penalties.

A taxpayer entering a payment arrangement with a tax pooling provider has the option of paying what they owe in instalments or deferring payment of the full amount to a date in the future that better suits them.

Approval is guaranteed, and no security is required.

How does it work?

The tax pooling provider makes a deposit into its IRD account on behalf of a taxpayer on the date their provisional tax payment is due (e.g. 15 January 2020). This deposit is date stamped as at the date it is made.

A taxpayer then goes about paying the tax pooling provider the core tax.

If they pay the full amount of tax owing, the tax pooling provider will transfer the entire deposit it is holding in its IRD account on behalf of that taxpayer to the taxpayer’s IRD account.

As this deposit carries a date stamp as at the date it was made, IRD will recognise it as if the taxpayer paid their 15 January provisional tax on time once it processes this transfer. This will eliminate any IRD interest and late payment penalties.

If the taxpayer opts to pay what they owe in instalments, the tax pooling provider transfers to the taxpayer’s IRD account an amount of the date-stamped tax deposit that matches the amount of every part payment they make until they satisfy their liability.

IRD will remit all interest and late payment penalties once the taxpayer pays the full amount owing.

What is the cost?

The taxpayer has some interest to pay – but this is cheaper than the 8.35 percent IRD charges when a taxpayer misses or underpays 15 January provisional tax.

Generally, it’s also less than a taxpayer’s existing finance rates.

A taxpayer choosing to finance the full payment of 15 January provisional tax to a later date will pay a fixed interest cost up front.

This is because they are agreeing to pay what they owe at an agreed upon date in the future.

The interest cost is based on the tax amount due and the date in the future they wish to pay.

Interest works a little differently if a taxpayer chooses to pay in instalments. The tax pooling provider will recalculate its interest on the core tax remaining at the end of each month.

Other options for 15 January provisional tax and how tax pooling compares

Another possibility is setting up a payment plan with IRD.

However, as part of this process, you will need to supply financial information and details around the timeframe you expect to settle your liability. IRD interest will continue to apply during any arrangement you strike.

You could also consider a short-term bank loan if cashflow issues will make paying 15 January provisional tax problematic. Again, there’s a process to go through and certain lending criteria must be met.

What you can do now

No doubt you are doing everything between now and when jolly ol' Santa rides into town on his present-laden sleigh to make sure you have enough funds to make ends meet if you feel the Christmas-early New Year period is going to be tough.

That probably means the usual jazz: preparing a budget, prioritising jobs you can complete quickly, chasing up anyone who owes you money and seeing if you can buy more time with creditors. Every dollar counts, right?

We have more tips in our free guide Better Cashflow Management that you might also find useful.

Now is also the opportune time to seek professional advice if, after doing a forecast, you feel you may encounter some strife. A good advisor will work with you to ensure a potential holiday cashflow issue does not become a crisis and help you manage your 15 January provisional tax payment.