Payment options for 15 January provisional tax

One of the challenges of paying provisional tax in times of economic uncertainty is making a payment that is both appropriate and does not negatively impact your cashflow.

Tax is one of the largest expenditure lines for a business, so you want to get it right.

You don’t want to overpay, because that’s money sitting at Inland Revenue (IRD) that you could be utilising in your business. Conversely, you don’t want to underpay because you run the risk of facing IRD interest of seven percent and late payment penalties from the date of your underpayment.

Tax pooling offers a safety net if you cannot make your 15 January payment on time or accurately forecast your payment due to the impact of COVID-19.

It's a service that offers benefits not available to those who pay IRD directly, at no downside.

Pay provisional tax when it suits you

The Christmas-early New Year period is often a challenging time. After all, it is a four-week break from business as usual as things slow down.

For someone looking to manage cashflow, tax pooling lets you pay your 15 January provisional tax when it suits you.

Acceptance is guaranteed, and no security is required.

As an IRD-approved tax pooling provider, Tax Management NZ (TMNZ) can be used to pay your tax on the actual date it is due (e.g. 15 January 2022).

You then pay TMNZ as soon as cash is available and IRD recognises it as if the money was paid on time by you.

There are a couple of ways to pay.

You can finance your provisional tax payment. This sees you pay a fixed interest cost upfront and then the core tax amount at an agreed date in the future.

Alternatively, you can enter an instalment arrangement. Under this payment plan, interest is recalculated on the core tax amount owing at the end of each month.

The instalment arrangement offers flexibility in the sense you can pay as and when it suits your cashflow.

All tax pooling arrangements eliminate late payment penalties. The interest payable is significantly cheaper than the seven percent IRD charges if you fail to pay on time.  

Pay what you think, top up later

Most taxpayers tend to base their provisional tax on a 105 percent uplift of the previous year’s liability.

However, the current economic climate may have forced some in highly impacted sectors to revise expectations around profitability for the 2021-22 income year to the point where making payments based on the calculation above is no longer appropriate.

Others simply may be facing difficulty forecasting their liability due to the uncertainty of COVID-19. As such, they may want to keep cash close at hand in case things change suddenly.

Now there is some good news.

You do not need to pay provisional tax on 15 January based on uplift, nor do you have to file an estimate to pay less than uplift.

Instead you can pay provisional tax based on your forecast expectations of profitability for the year at the time.

Don't worry if, once you determine the liability for the 2021-22 income year, it transpires that you have underpaid. You can purchase any additional tax you owe on 15 January 2022 from TMNZ.

This can be done at a cost that is less than IR’s debit interest rate. It also eliminates any late payment penalties incurred.

That's because the tax you are purchasing from TMNZ was paid to IRD on the date it was originally due.

You pay the core tax plus TMNZ's interest cost when you make your payment to TMNZ. TMNZ then applies the date-stamped tax sitting in its IRD account against your liability.  

IRD will treat it is if you paid on 15 January 2022 once it processes this transaction. The remits any late payment penalties showing on your account.

Please contact us if you have any questions about tax pooling.


Image: Miscalculate

Miscalculated your tax loss carry-back? Don’t worry – help is at hand

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.

 


IRD payment allocation rules explained

Provisional tax payments made on or before the date of the final instalment for the year are applied to the oldest overdue tax amount first while payments made after the date of the final instalment are applied to the interest owing on any overdue tax first, then the overdue tax amount.

The IRD payment allocation rules – which are found in s120F and s120L Tax Administration Act 1994 – also apply to payments made via a tax pooling provider such as Tax Management NZ (TMNZ).

It’s important to understand how they work and differ from one another.

Detailed explanation

Section 120L covers provisional tax payments made on or before the date of the final instalment for the year.

It requires IRD to apply a payment to unpaid tax in order from oldest to newest. Please note the unpaid tax amount(s) include late payment penalties.

Section 120F deals with payments that are made after the date of the final provisional tax instalment for the year.

It requires IRD to apply payments, in the following order, towards:

  • The interest accrued on the oldest unpaid tax amount until that interest is paid.
  • The oldest unpaid tax amount until that tax is paid.
  • The interest accrued on the next oldest unpaid tax amount until that interest is paid.
  • The next oldest unpaid tax amount until that tax is paid.
  • To each subsequent arising interest and unpaid tax amount using the pattern above, in time order that relevant unpaid tax arises, until they are paid.

Again, the unpaid tax amount in s120F includes late payment penalties.

The ramifications

These allocation rules mean a taxpayer may well find a tax payment they intended to be destined for a particular instalment date is allocated by IRD’s system to earlier unpaid amounts first.

For example, let's say they may make a $10,000 payment on time and in full on 15 January 2021. However, if they failed to pay their 28 August 2020 (P1) provisional tax, then their $10,000 payment will be applied as per s120L to the overdue tax amount (including late payment penalties) at P1 first.

As such, this leaves them exposed to additional (and unexpected) late payment penalties and interest.

It does not matter if the $10,000 payment they made on 15 January 2021 is a date-stamped transfer from the account of a tax pooling provider. Please see sRP19 (1B) Income Tax Act 2007.

In other words, you need to clear the tax liability at all earlier instalment dates first.

How TMNZ can assist with missed provisional tax payments

It's best to purchase from TMNZ the backdated tax to cover the shortfall at the earlier instalment date.

This achieves two things.

Firstly, it eliminates late payment penalties and reduces the interest cost on the underpaid tax by up to 30 percent.

That’s because the tax you are purchasing from TMNZ was paid to IRD on the date it was originally due. IRD will treat it as if you have paid on time once it processes your transaction with TMNZ.

Secondly, it ensures that any other payment that was otherwise made on time and in full will be allocated to the particular provisional tax date for which it was intended.

A taxpayer has up to 75 days past their terminal tax date for that tax year to purchase the tax they require.

For example, if you have a terminal tax date of 7 February 2021, you will have until mid-April to settle your 2020 income tax with TMNZ. Those with a 7 April 2021 terminal tax date have until mid-June.

Please contact us if you have any questions. We're happy to help.


Payment options for 15 January provisional tax

One of the challenges of paying provisional tax in times of economic uncertainty is making a payment that is both appropriate and does not negatively impact your cashflow.

Tax is one of the largest expenditure lines for a business, so you want to get it right.

You don’t want to overpay, because that’s money sitting at Inland Revenue (IRD) that you could be utilising in your business. Conversely, you don’t want to underpay because you run the risk of facing IRD interest of seven percent and late payment penalties from the date of your underpayment.

Tax pooling offers a safety net if you cannot make your 15 January payment on time or accurately forecast your payment due to the impact of COVID-19.

It's a service that offers benefits not available to those who pay IRD directly, at no downside.

Pay provisional tax when it suits you

The Christmas-early New Year period is often a challenging time. After all, it is a four-week break from business as usual as things slow down.

For someone looking to manage cashflow, tax pooling lets you pay your 15 January provisional tax when it suits you.

Acceptance is guaranteed, and no security is required.

As an IRD-approved tax pooling provider, Tax Management NZ (TMNZ) can be used to pay your tax on the actual date it is due (e.g. 15 January 2021).

You then pay TMNZ as soon as cash is available and IRD recognises it as if the money was paid on time by you.

There are a couple of ways to pay.

You can finance your provisional tax payment. This sees you pay a fixed interest cost upfront and then the core tax amount at an agreed date in the future.

Alternatively, you can enter an instalment arrangement. Under this payment plan, interest is recalculated on the core tax amount owing at the end of each month.

The instalment arrangement offers flexibility in the sense you can pay as and when it suits your cashflow.

All tax pooling arrangements eliminate late payment penalties. The interest payable is significantly cheaper than the seven percent IRD charges if you fail to pay on time.  

Pay what you think, top up later

Most taxpayers tend to base their provisional tax on a 105 percent uplift of the previous year’s liability.

However, the current economic climate may have forced some in highly impacted sectors to revise expectations around profitability for the 2020-21 income year to the point where making payments based on the calculation above is no longer appropriate.

Others simply may be facing difficulty forecasting their liability due to the uncertainty of COVID-19. As such, they may want to keep cash close at hand in case things change suddenly.

Now there is some good news.

You do not need to pay provisional tax on 15 January based on uplift, nor do you have to file an estimate to pay less than uplift.

Instead you can pay provisional tax based on your forecast expectations of profitability for the year at the time.

Don't worry if, once you determine the liability for the 2020-21 income year, it transpires that you have underpaid. You can purchase any additional tax you owe on 15 January 2021 from TMNZ.

This can be done at a cost that is less than IR’s debit interest rate. It also eliminates any late payment penalties incurred.

That's because the tax you are purchasing from TMNZ was paid to IRD on the date it was originally due.

You pay the core tax plus TMNZ's interest cost when you make your payment to TMNZ. TMNZ then applies the date-stamped tax sitting in its IRD account against your liability.  

IRD will treat it is if you paid on 15 January 2021 once it processes this transaction. The remits any late payment penalties showing on your account.

Please contact us if you have any questions about tax pooling.


How to overcome the pain of tax procrastination

With Inland Revenue (IRD) currently charging a penalty of seven percent interest, you would think that every single business owner in New Zealand would be highly motivated to get their tax issues sorted.

Why then, is tax procrastination a problem?

Tax is an obligation. We have no choice but to get on top of it. Whether that's paying on time if we can or, if we can't, making alternative arrangements. Solutions may include tax pooling through Tax Management NZ or reaching an agreement with IRD. However, there is a segment of Kiwi taxpayers who continue to bury their heads in the sand despite the potential pain it may cause.

However, tax procrastination, it turns out, is a 'thing' and it's not laziness either.

Dr Piers Steel, author of the book The Procrastination Equation: How to Stop Putting Things Off and Start Getting Stuff Done calls procrastination 'self-harm'. It's hard to argue with him when you consider the breath-taking tax penalty regime we face in New Zealand.

Dr Fuschia Sirois, a professor of psychology at the University of Sheffield, recently told the New York Times: “Procrastination isn’t a unique character flaw or a mysterious curse on your ability to manage time, but a way of coping with challenging emotions and negative moods induced by certain tasks — boredom, anxiety, insecurity, frustration, resentment, self-doubt and beyond”.

In short, we use procrastination to manage an immediate negative mood rather than with getting on with the task.

Beating tax procrastination

Carleton University’s Tim Pychyl suggests that the next time you feel inclined to put off something – like getting your tax sorted – you should simplify your focus down to taking the first step. The very next action helps shift your primary emotion.

“Once we get started, we’re typically able to keep going. Getting started is everything,” he says.

First tasks

Having a handful of obvious first steps you can take will help start you on that critical first step.

1. First step, get expert advice

If you are concerned about cashflow, particularly in this year marred by COVID-19, find a tax adviser (your accountant or tax consultant). Should you already have one, pick up the phone and speak to him or her about your options – even if it's to book an appointment.

Take that first step.

2. List your next steps

In partnership with your tax adviser, get an understanding of what all your options are. These may include tax pooling or coming to an arrangement with IRD for an extension, or a repayment schedule. Do you qualify for Working for Families or the temporary tax loss carry-back regime?

Knowing your options helps you put in place tangible next steps.

3. Reduce the workload

Sometimes the thought of having to gather all the bits and pieces of information we need can seem like a chore well worth postponing. To combat this, put in place a system that keeps your source of financial information at your fingertips.

One Auckland accounting firm reports that they have to chase at least 30 percent off their clients for 'bits of information' and it can take months. Most businesses are GST registered, which means that at least 90 percent of your needed business data is already available by the time you file your GST return. Almost every accounting software package on the market will likely have an app that lets you track receipts and other financial information in real-time.

According to research, procrastination (in all its guises) can be associated with high stress and related acute health problems. That's because the things we procrastinate never go away.

Avoid the costs of tax procrastination. Know what steps you're going to take and start taking them today.


Tax loss carry-back scheme: Important considerations

Image: Primate thinking

Standard imputation (ICA), ownership continuity and grouping rules still apply under the new tax loss carry-back scheme, while anyone who overestimates their loss will face IRD interest (UOMI) from the date of their first provisional tax instalment for the previous year.

Moreover, company profits already paid out via shareholder-employee salaries or dividends are unable to be reversed to take advantage of the scheme.

A basic overview of the scheme

Under the temporary scheme, taxpayers who expect to make a loss in either the 2020 or 2021 tax year will be able to estimate that loss and use all (or a portion of it) to offset any profit made in the previous year.

This allows those who need cash urgently to receive a refund of any income tax paid in the previous year.

It applies to companies, trusts, and individuals (other than those deriving only PAYE income) and those that operate through partnerships and look-through companies.

The legislative reference is sIZ8 Income Tax Act 2007.

Here are some of the things you need to consider before electing to use the scheme.

The ICA rules

Be mindful that standard ICA rules apply as part of the tax loss carry-back.

That means in order to obtain a refund of income tax, a taxpayer must have an ICA credit balance at the end of the most recently ended tax year (i.e. 31 March 2020) that is at least equal to the refund amount.

Alternatively, they can complete an interim ICA return up to the date of their refund request.

Provisional tax deposits held in a tax pooling account that are refunded under the loss carry-back scheme will be subject to the imputation debit rules that normally apply for pooling.

Given the potential exposure to imputation penalty tax of 10 percent and UOMI, the timing of tax pooling refunds due to a loss being carried back should be considered on an ongoing basis to mitigate this risk. 

The results can be catastrophic if they’re not.

We strongly encourage you to contact us before you refund any balances from the pool.

Ownership continuity and grouping rules

The ownership continuity requirements that relate to the loss carry-forward provision, and the normal grouping rules, also apply under the tax loss carry-back scheme.

This means a company must have maintained at least 49 percent common ownership throughout the loss year and preceding profit year.

For entities part of a group, the group must have retained 66 percent common ownership throughout the loss year and the preceding year.

That said, there are provisions in the tax loss carry-back legislation that deal with part years in the ownership continuity period.

IRD has examples of this in its commentary for the COVID-19 Response (Taxation and Other Regulatory Urgent Measures) Bill.

Time bar rule

IRD can reassess both the loss year and the preceding profit year at the same time – even if the preceding profit year is time barred.

That is something to keep in mind.

Situations where the scheme cannot be used

A taxpayer must have taxable income in the previous year.

Given that, a company that has already paid out its profit via shareholder-employee salaries will not have any taxable income to which they can apply future losses they wish to carry back.

This is also the case if the taxpayer has already distributed its profits as a dividend or made a subvention payment.

Therefore, they cannot use the scheme.

Taxpayers who have ringfenced rental losses will not be able to carry back losses either.

It's the same with multi-rate PIEs. This is because they have a cash-out for losses that provides immediate tax relief in this situation.

Situations where it will offer limited benefit

A taxpayer can only carry back losses one year (e.g. from the 2021 tax year to the 2020 tax year).

As such, there will be situations where the scheme will only free up a small refund of income tax.

Example one

Tax year Taxable income
2019 Massive profit
2020 Modest profit
2021 Huge loss forecast

Someone can only carry back the huge forecast loss for 2021 to the extent of the taxable income in 2020. As you can see, this is considerably lower in comparison to the 2019 tax year.

This will result in a very small refund of tax under the scheme.

Example two

Tax year Taxable income
2019 Massive profit
2020 Small loss
2021 Huge loss forecast

Someone can only carry back the small loss from 2020 to the 2019 year. The huge forecast loss from 2021 cannot be utilised as part of the scheme.

Once again, this will result in a small refund of tax.

Here’s another thing to remember.

If the taxpayer is part of a wholly owned group of companies, the loss amount they can carry back is limited to the amount that cannot be offset against the profits within that group during the loss year. In other words, the loss must be used within the group first during the loss year.

UOMI ramifications

A taxpayer can re-estimate provisional tax in the previous year as many times as they like under the scheme. They can keep doing so up until the date they file their return for the loss year (or the date by which they must legally file this return if this is earlier).

However, re-estimating provisional tax means the UOMI rules in s120KB Tax Administration Act 1994 will apply.

That means if someone overestimates their tax loss carry-back for the loss year – resulting in tax to be paid later due to receiving a larger refund to which they were entitled – they will be liable to pay UOMI from the date of their first provisional tax instalment in the preceding profit year.

Interest will be charged on the difference between the income tax they owe for the profit year and the income tax they paid in that year.

The income tax they owe for the profit year is based on the original taxable income for that year, minus the actual loss from the loss year. The tax they paid in the profit year is based on the original taxable income for that year, minus the total loss year refund they initially received due to overestimating their loss.

The amount on which UOMI is charged will be split evenly across the number of provisional tax instalments payable for the profit year.

Section 183ABAB of the Act – which gives IRD the power to remit UOMI for taxpayers who cannot make tax payments after 14 February 2020 due to COVID-19 – will not be able to assist.

TMNZ can help reduce UOMI

However, someone who is incurring UOMI due to overestimating their tax loss carry-back can use TMNZ to reduce the interest cost by up to 30 percent on the additional tax payable if they are within 75 days of their terminal tax date for the profit year (or 60 days from the date IRD issues a notice of reassessment if the profit year is a closed income year).

Flexitax® allows them to apply backdated tax paid to IRD on the date it was originally due against their liability.

As such, IRD will treat the taxpayer as having paid on time once it processes this transaction, remitting any UOMI and late payment penalties incurred.

It’s a safety net for someone who has a ‘mare forecasting their loss.

It may pay to wait and see

For many taxpayers, the most recent tax year would have ended on 31 March 2020.

Up until the start of that month, when the impacts of COVID-19 really hit, everything was running smoothly. It’s quite likely their profitability was not significantly impacted.

But there’s a strong likelihood it will be during their 2021 tax year.

However, as it’s still early days in that year, having to estimate a loss to carry back to 2020 this far out is quite difficult.

Honestly, who really knows what the landscape will look like next month – let alone by 31 March 2021 – given the clouds of uncertainty lingering above the domestic and global economies in the wake of COVID-19?

The risk of incurring UOMI if they get it wrong means they may wish to err on the side of caution with their loss estimate and then re-estimate as the year progresses once the picture becomes clearer.

The other option is to hold off until later. That's what many appear to be doing at this stage given the low uptake.

Yet a downside of playing it safe or waiting a little longer is the taxpayer may not receive the full cashflow injection they are seeking right now.

Does their desperate need for immediate funds outweigh the potential UOMI consequences down the track, or can they afford to wait?

That’s something a taxpayer is going to need to weigh up before opting in.

Don't forget tax pool deposits

For those holding provisional tax deposits in TMNZ’s tax pool who want access to their payments now – but don’t yet have the confidence to file a loss carry-back – there is another option.

They can take a line of credit against their deposits, for interest rates below three percent. They also have the option of restoring those deposits at their original deposit dates once their cashflow situation improves.

However, there are a couple of things to note.

For starters, the ICA position needs to considered first as the debit rules for pooling apply in this situation as well since the transaction is treated as a sale of tax.

The tax must also be paid back and transferred to IRD within 75 days after the terminal tax date for that tax period.

Nonetheless, it's something else to think about if a taxpayer requires cash in the wake of COVID-19.

Summary

The above are some things of which to be aware when it comes to the tax loss carry-back scheme.

For business owners, this IS NOT tax advice. We recommend you speak with a tax specialist in the first instance about your particular situation. The legislation is quite complex.

You can find one of our premium accounting partners here.


Image: IRD system

IRD system issues affecting tax pooling

Image: IRD system

IRD is working to resolve the problem of its system incorrectly sending grace period letters to taxpayers flagged as using tax pooling.

However, they have fixed the issue which was seeing someone's GST refund being automatically applied to their provisional tax.

Here's what you need to know about both problems.

Plus, we also highlight some other system bugs impacting provisional taxpayers.

Grace period letters

Some taxpayers marked as using tax pooling to pay their income tax were receiving a letter notifying them that:

  • They didn't make a payment on time; and
  • IRD was giving them a grace period to pay before imposing late payment penalties.

This should not be happening.

We understand the cause of this issue is due to IRD's developers not fixing this problem as expected last year. They got diverted to other tasks before the change on which they were working made it through the test cycle and into production.

They are currently working to correct the accounts of those who have been impacted. This includes reversing the application of the grace period.

IRD will provide an update once it resolves the issue.

In the meantime, anyone who is using tax pooling can ignore any grace period letter they receive.

GST refunds applied to income tax

Despite someone being flagged in the system as having a tax pooling arrangement in place to pay their provisional tax, IRD was still applying their GST refund against their income tax.

Again, this should not be happening.

We understand the cause of this issue was IRD's system automatically ignoring the tax pooling indicator on someone's account.

That was part of a wider issue relating to GST refunds offset against provisional tax.

However, the problem has now been fixed and this will no longer happen.

That said, anyone whose GST refund was transferred to provisional tax prior to this fix will need to contact the department. They can do this by sending a message in myIR.

IRD will then reverse the transfer or refund any excess credits (where appropriate).

In case you missed it…

Below are the other system glitches impacting provisional taxpayers.

These updates from IRD are as at 16 April 2020. However, as far as we can tell, these are still ongoing issues.

Incorrect instalment dates

There is a problem causing some six-monthly GST filers to have three provisional tax instalments instead of two.

As a result, some taxpayers may have had interest (UOMI) charged incorrectly.

IRD is working on fixing this issue. It will provide an update once it finds a solution.

Incorrect UOMI and penalties on weekend due dates

There may be cases where late payment penalties and UOMI have been incorrectly charged if a provisional tax payment date fell on a weekend.

Again, the department is in the process of fixing this issue.

TMNZ will continue to keep you abreast of any IRD issue or update that pertains to tax pooling or provisional tax.


IRD adjusts UOMI rates

Image: IRD adjusts UOMI rates

Someone will now pay the taxman less interest (UOMI) if they underpay their tax – but literally receive nowt if they overpay.

That’s the key takeaway after IRD announced it is adjusting its UOMI rates today.

They are lowering the interest they charge for underpaid tax from 8.35 percent to seven percent.

IRD’s credit interest also falls from 0.81 percent to zero percent.

That’s right – someone will get no financial compensation if they pay too much tax now.

IRD's new rates are effective from 8 May 2020.

How IRD sets its UOMI rates

The department calculates its underpayment interest by taking the floating first mortgage new customer rate and adding 250 basis points.

A recent legislative amendment means their credit UOMI rate is now based on the higher of:

  • The 90-day bank bill, minus 100 basis points; or
  • 0 percent.

Previously, they used just the 90-day bank bill, minus 100 basis points to set this rate.

Without the legislative amendment, taxpayers would have faced the awkward situation of having to pay interest to IRD if they overpaid their tax given the Reserve Bank of New Zealand's 90-day bank bill sits at just 0.26 percent.


UOMI remission guidance: IRD overlooks provisional tax scenario

Image: Question mark.

Question: What is the amount on which IRD will remit interest (UOMI) at the date of the final provisional tax instalment if someone outside of safe harbour is unable to pay on time due to COVID-19?

The answer: We cannot say for certain as this is a scenario IRD has yet to address in its guidance (as of today’s date).

A taxpayer expecting their RIT for the year to be $60,000 or more must pay the remaining balance to settle their liability at the date of their final provisional tax instalment to avoid incurring UOMI.

For those with a 31 March balance date, 7 May 2020 is the final instalment for the 2020 tax year.

A problem that arises is someone might not know the actual RIT for the year by this date. In fact, it might be several months after the year-end before they determine this figure.

As paying the remaining balance on 7 May 2020 will therefore require some guesswork, there is a chance they could miscalculate and end up underpaying.

Example

A taxpayer expects to have RIT of $80,000 in the 2020 tax year and must pay the final balance on 7 May 2020 to avoid UOMI.

They believe the final balance to settle the RIT for the year will be $40,000.

However, because of COVID-19, they are unable to pay on 7 May 2020 and decide to seek assistance from IRD.

The department agrees to grant a remission of UOMI on the $40,000 for eight months under s183ABAB Tax Administration Act 1994.

However, when the taxpayer finalises their return eight months later, it turns out their 2020 RIT is $85,000.

This means they should have paid $45,000 on 7 May 2020 to settle the liability for this year.

All of which begs the question: How will the remission of UOMI work in this instance?

Below we look at three possible approaches IRD may take.

Option one

IRD might only agree to remit UOMI on the $40,000 because:

  • This is what the taxpayer determined what was due and payable on 7 May 2020 under sRC10 (5) and (6) Income Tax Act 2007; and
  • The taxpayer should have had a reasonable expectation of their final liability for the 2020 year given the 7 May 2020 instalment is due after their year-end.

Option two

IRD may take an approach where its UOMI remission at the date of the final instalment applies to the lesser of:

  • The amount calculated by the taxpayer to the settle the liability ($40,000); or
  • The amount that is required to settle the liability ($45,000).

In both options one and two, the taxpayer will liable for UOMI on the $5000 shortfall from 8 May 2020 until this is paid.

Option three

IRD might be generous and agree to remit UOMI on the final balance of $45,000.

If that’s the case, a taxpayer unable to pay on time due COVID-19 receives a major concession for their miscalculation.

Flexitax® is your safeguard

However, this is merely speculation at this stage.

Until IRD clarifies its position, a taxpayer may wish to consider entering a Flexitax® arrangement as a safeguard.

If the department agrees to a full UOMI remission, cool bananas. There’s no requirement to follow through with the arrangement.

If IRD only agrees to waive UOMI on the amount calculated by the taxpayer, then Flexitax® lets them reduce the interest cost they face on any additional tax payable by up to 30 percent.

As always, we look forward to the department’s clarification.

Over to you, IRD.

 


Image: Pay your tax now here!

COVID-19: How tax pooling can still help taxpayers

IRD may be taking a more flexible approach in terms of its interest (UOMI) remission for taxpayers grappling with the financial impact of COVID-19 – but any request for relief will still be at its discretion and on its terms.

As such, an IRD-approved tax pooling provider such as Tax Management NZ (TMNZ) can assist with provisional tax this month if someone:

  • Misses out on a remission of UOMI.
  • Wants greater payment flexibility to manage cashflow during this difficult time than what they'll receive if entering an IRD arrangement.
  • Prefers not to deal with the taxman.

IRD: ‘If you say you can’t pay, we’ll believe you’

During a Chartered Accountants Australia and New Zealand webcast last month, IRD said they will take a taxpayer at their word if they tell them they cannot pay tax on time due to COVID-19 and accept most applications to waive UOMI if they are for no more than two years from the date the legislation was enacted (this being 25 March 2020).

Taxpayers DO NOT need to have exhausted all financing options before seeking assistance either.

This indicates IRD will be more flexible in its remission of UOMI. It was certainly a different tone to what was found in the general guidance document they issued last month.

And that’s not a bad thing for those reeling from the effects of COVID-19.

Our view

However, we believe the department's approach to the remission of UOMI will fall somewhere in the middle. It won't be as heavy-handed as their general guidance suggest, nor will it be a no-questioned-asked waiver for all.

As such, with provisional tax instalments due on 7 May and 28 May, we explain how tax pooling can be of assistance to taxpayers who are short on cash given the current economic climate.

Below we compare the service to IRD’s remission of UOMI.

Tax pooling offers more flexibility

With Flexitax®, taxpayers have the complete flexibility to pay what they want, when they want for up to 13 months.

While IRD is applying a high-trust approach in terms of applications and offering a remission of UOMI until 25 March 2022, it may still determine the type of payment arrangement it strikes with a taxpayer, the length of that arrangement and the date(s) by which someone must make payment(s) after it reviews someone's request.

There is also an expectation for anyone seeking relief to pay the tax they owe as soon as practicable. Remember, this is not a tax holiday. Only in extreme circumstances will someone be granted 22 months to pay.

If someone cannot honour their arrangement, they will need to contact IRD to renegotiate an extension or request a write-off. They will have to show they've made every possible effort to pay their liability by the agreed date. Whether someone is granted an extension or write-off will come down to IRD’s discretion.

Given that, even though TMNZ interest applies during any Flexitax® arrangement, some may find paying this negligible seeing as it gives them the freedom to manage cashflow by letting them make payments as and when it suits them, rather than having to meet the rigid terms of IRD’s payment arrangement.

A taxpayer has 75 days past their terminal tax to settle any 2020 income tax they owe with TMNZ. They only pay for the tax they require and can easily amend the arrangement to reflect this.

TMNZ’s interest cost is up to 30 percent cheaper than the 8.35 percent IRD currently charges when someone misses a tax payment. It is very competitive in comparison to most other forms of credit or finance.

And with tax pooling able to eliminate late payment penalties, this makes us the next best option for anyone wanting the flexibility to manage their cashflow.

Tax pooling is easier to arrange

Someone can complete a Flexitax® request in less than five minutes by phoning TMNZ or via their online dashboard. If emailing us, we can have the arrangement ready to go within five hours of receiving someone’s correspondence.

It is also light touch in terms of organising. After all, approval is guaranteed, and no security or financial information is required.

The only thing TMNZ needs is a taxpayer’s IRD number.

Compare that to IRD.

A taxpayer applying for a remission of UOMI will require some financial documentation before they make their submission. While IRD may not ask for this information in all situations – they say it will only be in cases of serious hardship where someone is requesting a write-off of the tax they owe– it’s important to have it ready just in case.

IRD will not finalise and approve anything until it completes a review of the application. That can take three working days or more.

The department is also experiencing unprecedented query volumes right now due to COVID-19, so this may mean getting a response takes longer.

Tax pooling is your safety net

We encourage those seeking IRD relief to enter a Flexitax® request just to be on the safe side.

That’s because there are no guarantees IRD will accept someone’s application for UOMI remission. Again, discretion is key.

If the department accepts the request for relief, then great. There’s no obligation to complete the arrangement.

On the other hand, if IRD declines someone’s request for a remittance of UOMI, a taxpayer can rest safe in the knowledge that they have a way to defer their upcoming 2020 provisional tax payment until June next year, while eliminating late payment penalties and reducing their interest cost.

Please contact TMNZ today if you wish to know more about Flexitax®.