How you can use tax pooling like a savings account

In business, cash is king, and being able to access funds quickly in a crisis can mark the difference between success and failure. In an unpredictable world, having the ability to access cash during challenging times can be priceless.

With tax pooling, companies can easily request refunds of provisional tax payments they have made at the year to date without waiting to file their tax returns. They can receive their refunds within a matter of days.

Tax can be one of the largest expenditure lines for a business, so flexibility is vital.

In this economic climate, it’s far from ideal to have large sums tied up with Inland Revenue (IR).

What if you can’t access the money in an emergency?

What if your profitability projections trend down over the year, meaning you’re likely to overpay?

For taxpayers with a 30 June year-end, the first instalment of provisional tax is due on 28 November. Every business and sole trader should ask themselves these questions, especially if their work is seasonal or cyclical in nature.

Businesses should also think about the accessibility of their funds if their income is difficult to predict or fluctuates due to factors such as commodity prices, adverse weather events, or the exchange rate.

Accessible tax money

Depositing tax payments into a tax pool can form part of an effective risk management strategy in times of uncertainty.

Look at it like depositing into a savings account with the added benefit of eliminating late payment penalties and IR interest. You can still access your funds if you need to, you’re covering yourself for tax time and possibly extending your time to pay.

How depositing provisional tax into a tax pool works

Tax pooling operates with the blessing of the New Zealand tax department. TMNZ has been a registered provider of the service since 2003.

Companies deposit their provisional tax payments into a shared pool instead of directly into their own IR account.

Each payment is date stamped as at the date it is made into the pool (e.g., 28 November). Funds are held in an account at the IR. This account is managed by an independent trustee, Guardian Trust.

A taxpayer holds their payments in the pool until it instructs TMNZ to transfer their deposits to their own IR account.

Taxpayers can request a refund from TMNZ of provisional tax deposits held in the pool at any time without having to file their tax return or an estimate with IR.

Refunds may be subject to meeting anti-money laundering requirements. (Corporate taxpayers also need to be mindful of imputation credit account impacts when requesting a refund of tax they hold in the pool).

A taxpayer typically instructs TMNZ to transfer their tax deposits to their own IR account once they finalise their tax return and know the amounts required at each instalment date to satisfy their liability for the year.

As the tax being transferred from the TMNZ tax pool to a taxpayer’s IR account has been date stamped to when it was originally paid into the pool, IR recognises it as if the taxpayer paid the whole amount on time.

This remits any IR interest and late payment penalties showing on the taxpayer's account.

Access previously paid funds

If you’re short on cash, tax pooling also allows you to temporarily withdraw deposits you hold in our pool.

You can access the amount of provisional tax funds you have deposited (minus an upfront interest cost). You also have the option to restore your deposit at the original deposit date once your cashflow situation has improved.

Buy some time

When preserving cashflow is high on the agenda, you can use a tax pool to defer upcoming provisional tax payments to a date in the future without incurring late payment penalties.

For example, someone with a 7 April terminal tax date could have up to 75 days from that date to settle their provisional tax.

Earn more interest if you’ve overpaid

If you have surplus tax remaining in the pool once you have transferred money to the IR to satisfy your liability, you can earn interest above the IR’s credit interest rate by selling the excess tax to other pool members that have underpaid for the year or have received a notice of reassessment from the IR.

Please note that this is subject to market demand.

The purchasing taxpayer can reduce the interest cost faced on their underpayment significantly when applying this tax against their liability. This also eliminates any late payment penalties.

Overpayers earn more interest while fellow taxpayers pay less. Everyone’s a winner!

Find out more

To learn more about managing your provisional tax, check out our calculating provisional tax guide and cashflow management tips for businesses.

Alternatively, please get in touch with our friendly support team if you have any questions. We're always happy to help.


New Survey Shows Inland Revenue Helpful, But Hindered

Press Release: Chartered Accountants Australia and New Zealand and Tax Management New Zealand

24 November 2021

 

Helpful, but hindered is the overarching finding in a new survey digging into public practice accountants’ experiences with Inland Revenue (IR).

Conducted by Chartered Accountants Australia and New Zealand and TMNZ, the survey of 361 members in public practice asked a range of questions about the timeliness of IR’s service, the quality of interaction, and the business support on offer.

“Over 80 per cent of those surveyed rated their agent account manager interactions positively over the last 12 months, which Inland Revenue should be pleased with,” said CA ANZ NZ Tax Leader John Cuthbertson.

“The flipside is that it is taking much longer for Inland Revenue to resolve queries. The number of public practitioners who say it’s taking more than 6 days to resolve their queries has risen from 5 per cent of respondents, to 47 per cent.”

Despite this, accountants and tax agents are positive about not only their interactions with account managers, but also the support measures that Inland Revenue has administered.

“Accountants and agents across New Zealand are telling us that the tax support provided by Inland Revenue has been as effective this year, as it was last year,” said Tax Management New Zealand Chief Executive, Chris Cunniffe.

“It’s been another turbulent year for businesses, and the tax relief and support measures have made a positive difference. It’s just that our survey shows it can take a while to get through to Inland Revenue, and to have queries resolved and assistance locked in.”

The appreciation of Inland Revenue’s support was illustrated by 85 per cent of participants reporting that they had clients who utilised the remission of interest and penalties for late payment of provisional tax due to COVID.

Additionally, over 71 per cent of participants have found it easy or not difficult, to enter into or assist clients with an instalment arrangement in the past 12 months. This covers all types of tax, including GST, PAYE and FBT, not just provisional tax.

The increased level of scrutiny and information required to access COVID support was also felt by survey respondents.

“Approximately half the survey respondents said that accessing COVID support was harder than in 2020. That’s not surprising, given the public’s desire for more scrutiny about who received support, and the declarations becoming more stringent during this year’s lockdowns,” concluded Mr Cuthbertson.