Cashflow survival: Dealing with terminal, provisional tax

Image: Cashflow survival - dealing with terminal, provisional taxThe 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:

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.