How tax pooling can help your tax management
Meet Andy, a builder who has run his own business for three years. Things are going well, and he’s set to make a substantial profit in the current financial year. He’s well-paid and smart enough to set aside tax he owes with each payment. But clients don’t always pay him on time, causing some serious headaches.
Like many businesses, Andy experiences cashflow issues. He makes a profit but doesn’t always have enough funds in his account to pay provisional tax when it’s due.
What should Andy do? Grin and bear the Inland Revenue’s late payment penalties and use of money interest charges after missing his payment dates? Or seek a better option?
Luckily, Andy’s accountant Lisa knows all about tax pooling and how it can relieve the financial pressure.
Tax pooling explained
Andy asks his accountant how tax pooling works and some of its main benefits.
Lisa explains that tax pooling has been available to taxpayers for two decades, starting in 2003 when Tax Management NZ (TMNZ) became a registered provider with IRD.
The accountant says tax pooling has clear benefits over traditional tax management:
- Taxpayers can choose to pay their liabilities in a time and manner that suits them, without having to worry about IRD interest and penalties.
- They can make significant savings on use of money interest charged and eliminate late payment penalties if they miss or underpay provisional tax, or if they are reassessed by IRD.
- When taxpayers overpay into the TMNZ tax pool, they can earn a much higher rate of interest on overpayment of funds than they would receive from the IRD.
Who oversees TMNZ’s tax pool?
Lisa assures Andy that all payments made into TMNZ’s tax pool account at the IRD are managed by an independent trustee, Guardian Trust.
Guardian Trust oversees the bank accounts into which taxpayers pay their money, as well as the transfer of funds from the TMNZ tax pool to Andy’s IRD account.
Because the tax being transferred has been paid and date stamped as at the original due date, any penalties and interest are wiped once the payment is processed by the IRD.
Companies of all sizes can use tax pooling
Tax pooling can help businesses of all sizes, from companies with thousands of employees down to sole traders. TMNZ’s tax pool is the largest and most established in the country.
Lisa’s research found two companies TMNZ has helped.
One company uses tax pooling to counteract fluctuating seasonal revenue:
“It takes away all those stresses. You’re passing it on to somebody else and saying, ‘take care of this for me, I don’t know what to do, we’ve got a shortage of cashflow’ and it’s the best way of putting more energy into your business and doing the things that you’re good at.”
The second company uses a tax pool as they need to invest in equipment regularly.
“With a business like ours, we are investing quite heavily into assets like cars, campers, and boats. Cash upfront is important [for] us to have.”
Tax Management NZ has helped both companies manage working capital and mitigate the risk of fees and penalties.
“What is the cost of this?” Andy asks.
“Just TMNZ interest,” Lisa replies.
Tax pools can help with voluntary disclosures and audits
Lisa looks through Andy’s expected outgoings for the year. These range from the cost of living to many other expenses associated with owning a business.
The accountant realises that in a previous year, Andy made a mistake on one of his returns and must file a voluntary disclosure with the IRD.
“How can Andy get ahead with the current year if he now has to pay an additional amount of tax for a past year?” Lisa wonders.
TMNZ can assist taxpayers who owe an increased amount of tax as a result of a voluntary disclosure or audit.
Tax pooling provides 60 days from the date the IRD reassessment notice was issued to buy the tax payment he needs and send it to the IRD.
The different tax types available to purchase are historic income tax payments, deferrable tax, and agreed delay tax, as well as other tax types such as GST, RWT, PIE, FBT, NRT, and DWT.
Lisa can use TMNZ to reduce the interest and late payment penalties cost of Andy’s voluntary disclosure.
For the current tax year, Lisa can set up either a Flexitax® or Tax Finance arrangement to give him more flexibility and time to pay (up to 75 days past his terminal tax date for that tax year).
Lisa has other clients that are medium-large taxpayers with big bills and paydays. TMNZ’s Tax Deposit product can help them.
Other advantages of tax pooling
There are several other advantages to using a tax pool:
- Excess funds paid into the pool can either be used for future dates and any other tax types where a reassessment has not been issued.
- There’s the option to sell surplus tax to a taxpayer who has underpaid to earn additional interest.
- The refund process is much faster than directly through the IRD (within three to five days, and without having to file a return for the year).
Take back control
Take control of your tax management with TMNZ tax pooling — a more convenient way to meet your provisional tax obligations.
We offer solutions for all kinds of businesses and financial situations. If you’re new to paying provisional tax, check out our resources on managing tax and business cashflow here.
Ask your accountant about tax pooling options today, or get in touch with our team to find out more.
Audit claim data highlights level of IRD’s behind-the-scenes activity
Inland Revenue (IRD) is still actively reviewing taxpayers despite COVID-19 and the various business disruptions the pandemic has caused in the past 12 months, according to figures released by Accountancy Insurance.
They saw a 31 percent increase in claims in all categories during the 2020-21 financial year compared to the 2019-20 financial year.
In terms of the proportion of claims, most related to GST verification (55 percent) and income tax returns (nearly 28 percent).
GST verification claim activity increased by 48 percent and income tax return-related claim activity by 67 percent in the 12 months to 31 March 2021.
The income tax return claim activity included cases relating to two campaigns IRD commenced in late 2020: They were the increased enforcement of the bright-line rules in December and the Automatic Exchange of Financial Account Information programme in November.
Accountancy Insurance says the following taxpayer categories had the highest number of claims during the 2020-21 financial year:
- Sole trader/partnership/non-trading company and trusts.
- Business groups <$500,000-$3 million turnover.
Industries under the spotlight
As most know, IRD has access to several large data sources which they use to help identify high-risk industries where there could potentially be low levels of tax compliance.
Low levels of compliance are usually seen in sectors where there is a high level of cash transactions.
Hospitality and construction are two such industries that IRD monitors regularly. The tax department recently launched a new campaign aimed at the latter.
And as well as property and the real estate industry, IRD is also taking an interest in cryptoassets.
Accountancy Insurance notes that client risk review claim activity decreased by 62 percent in the 12 months to 31 March 2021. In fact, this accounted for just 9.74 percent of all claims.
However, that was likely because the businesses which are typically subject to these reviews and audits were the ones most affected by multiple COVID-19 lockdowns in 2020.
They expect things will return to normal throughout 2021 as IRD ramps up its audit activity.
Reminder: We can help with IRD audits and voluntary disclosures
As an IRD-approved tax pooling provider, Tax Management NZ (TMNZ) can be used to get significant savings on Inland Revenue interest if they owe additional tax as a result of IRD issuing a notice of reassessment after an audit or voluntary disclosure.
TMNZ lets someone apply tax that was paid to IRD on the original due date(s) against their liability.
As such, IRD treats it as if they paid on time once it processes this tax pooling transaction. This eliminates any late payment penalties. Please note the legislation prohibits us from assisting with shortfall penalties.
A taxpayer can use TMNZ to reduce the interest cost on the difference between the original assessment amount and the reassessed amount that arises due to an audit or voluntary disclosure.
We can assist with income tax, and other tax types such as GST, PAYE and FBT when there is a reassessment.
Someone has up to 60 days from the date IRD issues the reassessment notice to pay the tax they owe via TMNZ.
TMNZ has the largest and oldest supply of audit tax in the market.
Please contact us if you have any questions about tax pooling. We’re happy to help.
IRD eyeing cryptoassets: Tax implications for investors
Come clean or expect Inland Revenue (IRD) to come calling.
For investors who are unaware of their tax obligations, this is the situation they face in the wake of the New Zealand tax department exercising its powers under the Tax Administration Act 1994 to request customer information from companies dealing with cryptoassets.
This appears to be part of a OECD initiative. The intergovernmental economic organisation recently released a comprehensive overview of the current tax treatment and tax policy gaps across the main taxes applicable to cryptoassets. This report looks at more than 50 jurisdictions, including all G20 and OECD nations.
IRD says it wants to help people get things right from the start.
It will not be surprising if investors receive a letter reminding them of their obligations and encouraging them to fess up if they have failed to disclose any income made from cryptoassets.
And investors would be wise to take heed of this correspondence.
After all, the information requested from cryptoasset companies includes customer blockchain wallet addresses and transactions until 31 March 2020.
It’s this type of data that may enable IRD to find other cryptoasset exchanges someone uses – even if those exchanges are based overseas – and compare the profile of cryptoasset investors against the position taken in their tax returns to see if there are any anomalies.
Don’t underestimate the department either. Its investigation staff are very effective at using this type of information to connect the dots. Just look at their work in the ‘Hidden Economy’.
What will be fascinating to see is just how much tax IRD is able to recover.
It has the potential to be quite a significant sum as the tax implications of cryptoassets do not appear to be widely understood by investors.
Tax treatment of cryptoassets
IRD treats cryptoassets as property for the purposes of tax, so normal income tax rules apply.
Its default view is that most people acquire cryptoassets with the intention of selling them. That’s because cryptoassets don’t pay interest and it’s only upon disposal that someone will realise a return on their investment.
This is very similar to its position on gold.
As such, in most cases, the profit an investor makes from disposing or exchanging cryptoassets is taxable.
To determine if tax is payable, IRD will look at the main purpose for acquiring cryptoassets at the time of acquisition.
Unless a person can provide clear and compelling evidence that shows they did not acquire cryptoassets with the intention of selling them, they must pay tax.
It does not matter how long someone plans to hold on to cryptoassets for before selling or exchanging them. A person’s main purpose can still be to sell or exchange them, even if it takes a several years for them to do so.
Cryptoasset income must be included as ‘other income’, business income or self-employed income in tax returns.
People must also keep accurate and complete cryptoasset records. They must hold these for at least seven years.
You can find more information on IRD’s website. It recently issued updated guidance on the tax treatment of cryptoassets.
This is a useful starting point and explains how it sees the rules applying for individuals and businesses. They even provide a few examples, too.
We strongly recommend you cast your eyes across this.
What to do now?
Investors would be wise to weigh up their next move now that IRD is looking further into cryptoassets.
The first thing to do is to speak to an accountant if you are unsure of your tax obligations. After all, this is a complex area and specialist advice should be sought.
In the event someone discovers they do have tax to pay on the profit they made from selling, trading, exchanging, mining or staking cryptoassets, they should consider making a voluntary disclosure.
The consequence of not disclosing taxable income can be brutal, with IRD charging shortfall penalties of up to 150 percent of the tax liability and usurious interest. The latter is currently seven percent, although has been much higher.
However, the truth shall set you free.
Making a voluntary disclosure can see shortfall penalties eliminated. Even if IRD has notified someone of an impending audit, there is still a possibility of a 40 percent reduction in shortfall penalties if someone comes clean before the investigation commences.
Reduce the interest cost with tax pooling
An IRD-approved tax pooling provider such as Tax Management NZ (TMNZ) can be used to reduce the interest cost significantly, if someone owes additional income tax due to failing to disclose the profit they made from their cryptoassets.
TMNZ lets someone apply tax that was paid to IRD on the original due date(s) against their liability.
As such, IRD treats it as if they paid on time once it processes this tax pooling transaction. This eliminates any late payment penalties. Please note the legislation prohibits tax pooling from assisting with shortfall penalties.
For the current tax year (2021) or one just completed (2020), someone has up to 75 days past their terminal tax date for that tax year to pay the additional income tax they owe via TMNZ.
In the event a person receives a notice of reassessment from IRD due to an audit or voluntary disclosure, they can use TMNZ to reduce the interest cost on the difference between the original assessment amount and the reassessment amount.
We can assist with provisional and terminal tax, and other tax types such as GST, PAYE and FBT when there’s a reassessment.
Someone has up to 60 days from the date IRD issues the reassessment notice to pay the tax they owe via TMNZ.
Please contact us if you have any questions about tax pooling. We’re happy to help.