IR 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 Inland Revenue (IR) 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 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 IR 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 IR 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 IR’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 significantly reduces the interest cost on the underpaid tax.
That’s because the tax you are purchasing from TMNZ was paid to IR on the date it was originally due. IR 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 (IR) that you could be utilising in your business. Conversely, you don’t want to underpay because you run the risk of facing IR interest 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.
It's a service that offers benefits not available to those who pay IR 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 IR-approved tax pooling provider, 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 IR 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 what IR 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. 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 IR 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 IR account against your liability.
IR will treat it as 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.
Don't let 15 January provisional tax cause stress
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 IR-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.
Pay 15 January provisional tax when it suits you
An IR-approved tax pooling provider such as TMNZ offers provisional taxpayers payment flexibility, without having to worry about Inland Revenue (IR) 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 IR 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 IR account on behalf of that taxpayer to the taxpayer’s IR account.
As this deposit carries a date stamp as at the date it was made, IR will recognise it as if the taxpayer paid their 15 January provisional tax on time once it processes this transfer. This will eliminate any IR 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 IR account an amount of the date-stamped tax deposit that matches the amount of every part payment they make until they satisfy their liability.
IR 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 what IR 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.
How it compares to your other 15 January options
Another possibility is setting up a payment plan with IR.
However, as part of this process, you will need to supply financial information and details around the timeframe you expect to settle your liability. IR 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.
Walker & Co Real Estate remedy big provisional tax problem
Provisional tax is not without its challenges. Marc and Lee Walker from Walker & Co Real Estate know this all too well.
The husband and wife duo do not take umbrage at paying tax. No siree Bob. It’s part and parcel of being in business. And they accept it ain’t going away.
But they do have issues with the provisional tax system in its current condition.
Occasionally they feel the whole thing isn’t conducive to helping their small business grow. After all, having to pay tax even though they have not earned a single cent can certainly be a kick in the ribs.
But that is a consequence of Inland Revenue’s (IR) inflexible payment dates. Pay up – or pay the price.
If this sounds familiar, grab a pew and lend them an ear. Marc and Lee are about to detail how paying provisional tax with TMNZ enables Walker & Co Real Estate to remedy this problem.
Introducing Walker & Co Real Estate
To understand their perspective on provisional tax, one must understand more about their business.
They own and operate Walker & Co Real Estate. It’s a boutique agency in Upper Hutt. Warm and welcoming, it’s the type of place that caters to all walks of life. There’s always a cuppa on hand as they converse with buyers and sellers to deliver the best outcome. It certainly has that homely feel.
Collectively, Marc and Lee bring nigh on 20 years’ experience within the industry. So, they know what’s what. Five of those have been spent running Walker & Co Real Estate.
Like any business, there are peaks and valleys. There are sales aplenty in spring and Christmas. In winter, business chills a little.
That seasonality affects Walker & Co Real Estate. When cash is in short supply, Marc says it can be tough getting things like marketing and advertising squared away.
Adds Lee: “Obviously when your commissions come in there’s good money. However, you’ve got to sell a property before you get the cash coming in. So cashflow is definitely…very difficult.”
Provisional tax can hinder business growth
And the last thing Walker & Co Real Estate wants to do is hand over money to IR when things are tight.
That puts the kybosh on their business plans as they are having to use the funds they need to operate or would invest elsewhere to cover it.
That, in turn, does not help them earn the do-re-mi.
Why Walker & Co Real Estate uses TMNZ
As they prefer to keep money in their business, Walker & Co Real Estate chooses to pay its provisional tax with TMNZ. This allows them to make their payments when it suits their business cashflow.
“Having the resource to put into your business is very important,” says Marc.
“Growth is important and if you take resources away from companies like us, our growth gets stagnant a little bit and it takes longer to get traction. To not worry about [provisional tax], it certainly helps us grow.”
Lee agrees. “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.”
All that peace of mind costs the pair is TMNZ’s interest, which is much cheaper than the usurious interest IR charges. Not a bad trade-off for greater flexibility. No nasty late payment penalties either.
Lee says everything was easy to set up. Forget about phoning IR and, providing you can get through to someone, facing an “interrogation” from its staff.
“[TMNZ are] there to help you – and they know their stuff.
“If you are unsure of anything at all, they will answer everything in a way that you can understand it. The everyday person, because there’s accountant language and everyday person language and they put it in a way that you can understand it as an individual or a company.”
Just give it a try
Marc reckons other business owners should give serious thought to using TMNZ.
“You solve a problem for a lot of businesses,” he says.
“I talk with a lot of business owners and we’re all the same – there’s a certain month in the year that you need to get things squared away and this from my point of view would certainly help them.”
Lee is much more effusive in her praise.
“Every time you have got that payment coming up you know you can give them a call and they will have it sorted for you. When you use the professionals and they do a job and do it well, leave it to them.
“Try it for a couple of years and see how you go. You’ll never turn back and will use them every time.”
Cashflow survival: Dealing with terminal, provisional tax
The months of April and May can really tax your cashflow.
On 7 April, Inland Revenue (IR) 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, IR may also be applying interest of 8.22 percent to this underpayment.
A month later, IR 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 hardly 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 it's 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 IR’s debt collection team.
That's the last thing you want.
What if IR 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 IR on the date it was originally due against your liability. IR 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:
- Paying provisional in instalments.
- Deferring the full payment to a time in the future that better suits your cashflow.
Both payment plans reduce IR 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, get in touch