Can AIM taxpayers use tax pooling?
A taxpayer cannot use tax pooling to defer payment of, or settle, provisional tax instalments calculated under the accounting income method (AIM).
However, Tax Management NZ (TMNZ) can help AIM taxpayers with terminal tax or when they receive a notice of reassessment.
What does tax pooling legislation say about AIM?
Legislation in the Income Tax Act 2007 clearly states that a taxpayer can use tax pooling funds to satisfy “a provisional tax liability other than under the AIM method”.
Please refer to sections RP17-RP21 of the Act for further information.
Why IRD doesn’t allow tax pooling to assist with AIM payments?
Inland Revenue (IRD) says tax pooling manages taxpayers’ uncertainty around provisional tax payments and their exposure to interest.
Consistent with this objective, pooling is not currently available for tax types where someone has certainty of their liability at the time of payment (for example, GST).
Given the payments made under AIM are calculated on actual accounting profit, taxpayers will have certainty about what's due.
As such, it's IRD’s view that it's not appropriate to allow tax pooling for provisional tax payments calculated under AIM.
What does that mean for you?
IRD will reject the use of any tax pooling funds to satisfy an underpaid AIM instalment. As a result, late payment penalties and interest will continue to show on a taxpayer account.
They will, however, accept the use of tax pooling funds to settle a terminal tax liability. The same applies if an AIM taxpayer has additional tax to pay after receiving a notice of reassessment.
Please be mindful of these facts when entering arrangements with TMNZ.
It’s also an important consideration before electing to use AIM to calculate provisional tax.
That's because paying tax when income is earned is not necessarily the same as when cash is received.
If someone is unable to pay an AIM instalment on time or in full due to cashflow constraints, the safety net of tax pooling will not be available to reduce their exposure to interest and eliminate late payment penalties.
You're more than welcome to contact TMNZ if you have any questions.
Make IRD interest, late payment penalties disappear
A missed or underpaid provisional tax payment often means a taxpayer is faced with a steep interest cost and potentially late payment penalties on top of what they owe.
However, tax pooling can make that go away.
A big frustration with Inland Revenue (IRD) is that it expects taxpayers to pay the correct amount of tax on the dates it sets. No ifs, no buts.
Fail to adhere to this rigid timetable or underpay and you will face the consequences.
IRD charges interest – currently seven percent – from the date the payment was due until you pay the outstanding amount.
Late payment penalties may also apply as follows:
- One percent the day after payment was due.
- An additional four percent if the tax amount (including late payment penalties) remains unpaid after seven days.
A tax pooling provider such as Tax Management NZ (TMNZ) operates with the blessing of IRD. It can be of assistance if taxpayers find themselves in this situation.
Where might this be useful?
In the event you missed your recent 7 May provisional tax payment – or any other instalment relating to the 2020-21 income year, for that matter – we can eliminate any late payment penalties for which you may be liable and significantly reduce the interest you pay.
You make your payment to TMNZ and we apply backdated tax that was paid to IRD on the original date(s) it was due against your liability.
The taxman treats it as if you paid on time once it processes this transaction.
This wipes any IRD interest and late payment penalties showing on your account.
You have the option of making to TMNZ a one-off payment at a date of your choosing or making regular instalment payments towards your liability over a longer period.
TMNZ gives you up to 13 months to pay your 7 May provisional tax for the 2020-21 income year.
Is your 2020 terminal tax overdue?
You still have time to use TMNZ to reduce the interest cost and eliminate late payment penalties if you have outstanding provisional or terminal tax liabilities for the 2019-20 income year.
However, you will have to act quickly.
Tax pooling legislation gives taxpayers an additional 75 days past their terminal tax date to pay their terminal tax.
If your terminal tax for the 2019-20 income year was due on 7 April 2021, you would have until 15 June to settle owe with TMNZ.
Reassessed by IRD
TMNZ can also assist with historic income tax payments and other tax types such as GST and PAYE if you receive a notice of reassessment from IRD.
You have 60 days from the date the IRD issues this notice to use tax pooling.
Please contact us if you have any questions.
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.
Commissioner’s discretion for tax pooling
A provision within legislation allows taxpayers to use tax pooling for certain income tax or RWT voluntary disclosures where no return has been previously filed.
This is known as Commissioner’s discretion.
And it’s worth seeking if a taxpayer satisfies all relevant criteria (see below), as settling these underpaid tax types through an approved tax pooling provider such as Tax Management NZ (TMNZ) can result in notable interest savings. The interest we charge can be significantly lower than IR.
To use tax pooling for historical income tax and other tax types, there generally needs to be a notice of reassessment issued by Inland Revenue (IRD).
However, section RP17B (9) Income Tax Act 2007 stipulates that the Commissioner’s discretion found in RP17B (10) of the Act may be available in situations where a voluntary disclosure for income tax or RWT is made and a return for that tax type has not previously been filed.
The criteria for Commissioner’s discretion
That said, there are three conditions a taxpayer seeking Commissioner’s discretion to use tax pooling funds to settle income tax and RWT obligations must meet.
They are as follows:
- The increased amount arises as a result of an event or circumstance beyond the person’s control; and
- The person has a reasonable justification or excuse for not filing the return by the required date; and
- The person has an otherwise good compliance history for two income years before the income year in which the voluntary disclosure is made.
A taxpayer must satisfy all three requirements for the Commissioner to exercise her discretion.
This ensures that in exercising discretion she is satisfied that each occasion of non-compliance is not a deliberate act or a continuation of failures because of the taxpayer’s inadequate or poorly applied internal controls.
We recommend you refer to the examples 12 and 13 (pages 44 and 45) of the Tax Information Bulletin Vol 23, No 8, October 2011 to get a sense of the scenarios where IRD will allow or decline a request for Commissioner's discretion.
Applying for Commissioner’s discretion
The process is straightforward.
An application asking the Commissioner to exercise her discretion to use tax pooling funds can be made in writing.
Be sure to include the taxpayer’s name and IRD number in this correspondence.
Outline the details of the case in a few paragraphs. We recommend splitting this information under the following headings:
- Background information. Include information about the taxpayer and nature of their business. It should also contain contextual information that you deem relevant, such as historical business relationships, personal circumstances, and relationships with other/historical accountants.
- The increased amount arises as a result of an event or circumstance beyond the person's control. Include detailed (and chronological) events or factors that have occurred throughout the period in question that provide further contextual explanation as to how the liability has arisen and not been declared until now, and how this was beyond the taxpayer’s control.
- The person has a reasonable justification or excuse for not filing the return by the required date. Include any details that show the client has not been purposefully negligent.
- The person has an otherwise good compliance history for two income years before the income year in which the voluntary disclosure is made. Include details that support a good prior history. It’s important to show this occurrence is out of the ordinary and therefore worthy of consideration.
TMNZ has an email template available should you require this.
Requests asking the Commissioner to exercise her discretion can be sent to Rajni Raju at IRD by emailing Rajni.Raju@ird.govt.nz.
TMNZ is here to help
If you’d like further information on Commissioner’s discretion or wish to discuss a particular scenario, please call us on 0800 829 888 or email support@tmnz.co.nz.
How tax agents can kick the hourly billing habit
It doesn't matter how many times you hear this question; there aren't many other questions quite as capable of putting an expert practitioner on the spot like a butterfly pinned to a display cabinet than the dreaded: ‘What's it going to cost?’
For accountants, lawyers and others who sell their expertise, it sometimes seems the only measure of value is the clock, but time – unlike money – is finite and never an accurate estimate of an expert's value.
Hourly billing is something most clients – and experts – can understand. It is tangible and easy to grasp and sell because it doesn't put a price on anything (at least when you’re trying to win the client).
However, hourly billing is also widely disliked by both parties. It is not an accurate valuation of worth for the expert, and for the client, the final price remains a dreaded unknown. After all, how long is a piece of string?
The problem for many people who value their time by the hour is fear. They fear they may lose the client to somebody else who sets a tangible hourly fee, and they fear clients will become suspicious, or that there will be scope creep which leaves them out of pocket at the end of the day.
Unfortunately, the hourly bill also sets the expert up to be negotiated down and for limits to be set on a project's scope. It also opens them up to questions about how each unit of time was spent.
In essence, the biggest challenge to overcome with hourly billing is a change in mindset for both parties.
Base your value against objectives
Part of changing a client's mindset about project-based fees is to set expectations upfront.
Bestselling author Alan Weiss points out that clients know what they want, but they do not know what they need. As the expert in the relationship, your value-add comes from determining what it is they need.
Once you know the client's objective and – based on your knowledge of what they will need to get there – you are in a position to charge against a successful outcome across two or three scenarios. With most finance, tax and law-related issues, there will be varying levels of success. For example, a reduction in tax owed, or a write-off of tax owed or a repayment arrangement with the IRD.
The tax agent may spend the same amount of hours, give or take, in achieving one of those scenarios, but most people can agree that achieving a tax write-off for the client will be worth more to the client than a repayment arrangement with the IRD, and they'll be willing to pay accordingly.
Take an unrelated scenario, say in public relations. A multi-national operating in New Zealand may be under pressure from the media because they are accused of engaging in environmentally unfriendly practices. The local pressure is costing the company thousands, but globally the costs and damages are running into the billions.
The consultant, drawing on his or her expertise, may spend just two hours conceiving a strategy so successful, the multi-national rolls it out across the globe. Based on hourly rates, they would have earned a grand total of $600. Is that a true reflection of value?
Three things to consider
To shift your practice to a more value-added billing system, try these steps:
- Establish the client’s objectives. They may want the problem to 'just go away'. For example. letters of demand from the IRD. But what do they actually want? A repayment arrangement, a write-off of taxes, or a massive reduction in the debt?
- Using your expertise, determine what they need. What are the possible outcomes, from the worst-case scenario to the best-case scenario?
- Set your project-based fees against each scenario. For example, $900 for a repayment arrangement; $2000 for a partial debt write-off and a repayment plan or $4000 or a total write-off of the tax debt.
While every tax agent has an ethical duty to ensure the best possible outcome for clients, reality suggests that there will always be varying degrees of success. Charging against those ‘degrees’ of success may be a fairer outcome for all.
Finally, avoid seeing each client as a one-off problem to be resolved. Instead, view your first engagement as the start of a value-added relationship.
“As a professional engaged in providing service to your clients, the immediate urge may be to fix what ails the client. However, the long-term goals are best met by improving the client's condition.” – Alan Weiss
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.
Three tax pooling solutions for businesses impacted by COVID-19
IRD has announced a suite of tax relief measures during COVID-19 to help struggling businesses.
However, a tax pooling provider such as Tax Management NZ (TMNZ) offers some solutions of its own for those wishing to manage cashflow, facing uncertainty about their profitability or needing access to funds during this difficult economic time:
- Provisional tax payment deferral.
- Reducing exposure to interest if someone miscalculates their income tax.
- Using tax pool deposits as a line of credit.
Below we explain how these three tax pooling solutions work. We also compare them to IRD’s equivalent offering at this time.
1. Provisional tax payment deferral
Alternative to
IRD’s remission of interest if someone is unable to pay their tax on time.
Suitable for
Businesses who cannot pay on the prescribed instalment date due to cashflow constraints.
Drawback of IRD’s offering
At first glance, this looks pretty good. Even more so given IRD has the power to remit interest all the way up to 25 March 2022.
However, dig deeper and you will see its ability to wipe interest if a taxpayer fails to make a tax payment due after 14 February 2020 on time because of COVID-19 is discretionary.
That’s important to note.
Whenever discretion is in the mix, inconsistencies can arise and we have seen a number of these already.
There are also a few hoops to go through in terms of:
- Requesting the relief as soon as possible.
- Proving eligibility.
- Providing accounting and financial information to support a claim.
- Maintaining the agreed payment plan set by IRD to ensure there is no default. Remember, this is not a tax holiday. There is an obligation for someone to pay what they owe as soon as practicable.
TMNZ’s solution
For those wanting certainty of outcome or less hassle, tax pooling is a better option.
Indeed, someone wanting to manage their provisional tax payments in a way that better aligns with their cashflow requirements can defer an upcoming payment to a date in the future with TMNZ, without having to worry about late payment penalties.
For a taxpayer with a 31 March year-end, they would have up to 22 months from the date of the first instalment (28 August 2020) of the 2020-21 income year to settle their provisional tax.
That means payment would not need to be made until mid-June 2022.
Acceptance is guaranteed with tax pooling. No security or additional information is required.
There are a couple of ways to pay with TMNZ.
Someone can pay a fixed interest fee upfront and then the core tax at an agreed future date or make a one-off payment of interest and core tax when they figure out their liability.
They also have the option of paying what they owe in instalments.
TMNZ’s interest is much cheaper than the seven percent IRD otherwise charges if someone does not make a payment on time.
This cost may be negligible given a tax pooling arrangement is easier to set up, offers more payment flexibility and gives someone peace of mind at an uncertain time.
2. Reducing exposure to interest if someone miscalculates their income tax
Alternative to
IRD’s remission of interest on underpaid provisional tax for the 2020-21 income year for those using the standard uplift or estimation methods who are impacted by COVID-19.
Suitable for
Businesses who are uncertain how their year will play out due to the global pandemic.
Drawbacks of IRD’s offering
IRD’s recently announced relief is only for smaller- and medium-sized businesses with a liability of less than $1 million who can demonstrate their ability to forecast what they owe for the year at one or more provisional tax dates was “significantly adversely affected” by COVID-19.
In other words, any underpayment needs to be due to a change in circumstance that is totally out of their control (i.e. the border reopening), not human error. Those who have tools to forecast what they owe – as well as those who make no effort to forecast – are unlikely to qualify for the remission.
Someone not impacted by COVID-19 is expected to pay on time and in full.
The other thing to note is IRD will decide who qualifies for relief on a case-by-case basis after a taxpayer files their return for the 2020-21 income year.
Again, this is a discretionary power.
That poses a significant risk if someone is touch and go as to whether they meet the criteria for assistance. After all, if IRD declines their application, they will be up for IRD interest from the date of their first instalment for the 2020-21 income year.
TMNZ’s solution
A taxpayer facing uncertainty over their profitability for the upcoming year who does not want to pay provisional tax based on an uplift calculation from a pre-COVID-19 time has another option if they are unlikely to qualify for this remission.
They can make their provisional tax payments based on how their year is unfolding – and then use TMNZ to wipe late payment penalties and reduce the interest cost they face if they end up underpaying their tax.
We offer significant savings on IRD interest.
TMNZ let’s a taxpayer apply provisional tax that was originally paid to the tax department on the date(s) it was originally due against their liability.
As such, IRD treats it as if they paid on time once it processes this their tax pooling transaction. This eliminates any late payment penalties.
A taxpayer has up to 75 days from their terminal tax date for the 2020-21 income year to pay any underpaid provisional tax with TMNZ.
3. Using tax pool deposits as a line of credit
Alternative to
IRD’s temporary tax loss carry-back scheme.
Suitable for
Taxpayers who hold deposited funds in TMNZ tax pool in urgent need of cash.
Drawbacks of IRD’s offering
Under the temporary tax loss carry-back scheme, a taxpayer who expect to make a loss in either the 2019-2020 or 2020-2021 income 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.
However, some taxpayers are nervous about using the regime as they are uncertain how the 2020-21 income year will play out.
There are consequences if they overestimate the loss they are carrying back and this results in tax payable in the previous profit year.
In a nutshell, someone will incur IRD interest all the way back to the first instalment date of the profit year.
This is because they have to file an estimate with IRD in order to use the scheme. That subsequently takes them out of the interest concession rules that apply for standard uplift taxpayers.
TMNZ’s solution
Tax pooling allows someone short on cash to temporarily withdraw deposits they hold in the pool.
A taxpayer receives from TMNZ an amount equal to their deposited funds (minus an upfront interest cost), while having the option to restore those deposits at their original deposit date(s) when their cashflow situation improves.
Unlike the temporary tax loss carry-back scheme, there is no need to be in a loss position to access funds.
The ability to stay within the standard uplift interest concession rules also remains intact as there is no requirement to file an estimate with IRD.
Someone needs to give consideration to their imputation credit account balance before withdrawing any tax pool deposits.
It’s also important to note that funds taken out of the pool switch from own to purchased funds.
That means to reinstate the deposit(s) at their original dates, a taxpayer must have paid back and transferred the core tax from the tax pool to their account at IRD within 75 days of their terminal tax date for that tax year.
About TMNZ
TMNZ operates with the blessing of IRD and under legislation set out in the Income Tax Act 2007 and Tax Administration Act 1994.
Not only are we New Zealand’s first and oldest tax pooling provider, it was our company founder, Ian Kuperus, who came up with the concept and worked with officials to set up a framework.
TMNZ has been creating a better tax environment for businesses since 2003.
For more information about tax pooling, please feel free to contact us.
Increased provisional tax threshold: Legislative application
The rules that determine whether someone must pay provisional tax are still the same in terms of how IRD applies them.
However, what’s not the same for the 2021 and future tax years is the point at which they are applicable to a taxpayer.
That’s the important thing to remember if you’re struggling to wrap your head around how the increase to the provisional tax threshold works. (Don't worry, you're not the only one given the number of questions TMNZ has fielded recently from accountants in relation to this topic.)
Indeed, the legislation regarding whether a taxpayer has an obligation to pay provisional tax – particularly the rules found in sections RC3, RC6, RC9, RC13 and RC14 Income Tax 2007 – is essentially read and applied by IRD in the same manner it was before this change happened, albeit residual income tax (RIT) of $2500 has now been replaced with RIT of $5000.
That’s it. Nothing else is different.
To illustrate that point, let's look in more detail at how the provisional tax threshold increase impacts the 2021 tax year.
How it works in practice
Under the standard uplift method, provisional tax for the upcoming year is based on either:
- The RIT for the 2020 tax year uplifted by 105 percent (CY-1); or
- The RIT for the 2019 tax year uplifted by 110 percent (CY-2) if the 2020 tax return has not been filed and doesn't need to be until 31 March 2021.
If a taxpayer is basing an instalment for the 2021 year on CY-1 – or CY-2 if they have yet to file CY-1 – and the RIT in the return that is being used to work out what is due and payable at that point in time is $5000 or less, then they will have no obligation to pay provisional tax at that particular instalment date.
It does not matter one iota if, during the prior year that is being used for the uplift calculation, they were a provisional taxpayer due to their RIT in that year exceeding the old threshold of $2500.
The new threshold is all that matters.
Example
Meet Karen. She is a taxpayer with a 31 March balance date who has used the standard uplift method to calculate her provisional tax for the past two years.
She has the following RIT and filing date information.
| Tax Year | RIT | Date tax return was filed |
| 2019 | $4500 | 31 March 2020 |
| 2020 | $35,000 | Yet to file |
Her accountant has an extension of time arrangement with IRD and tells her he won’t be filing her 2020 tax return for at least another six months. As such, he is going to use her 2019 RIT as the basis to work out her first payment for the upcoming year.
Karen’s first provisional tax instalment for the 2021 tax year is due on 28 August 2020 (P1).
However, because her RIT for the 2019 tax year was $5000 or less, she won't have to make a payment at P1. The uplift amount due and payable will be $0.
The fact she was a provisional taxpayer during the 2019 tax year, albeit under the old threshold, means nothing.
If Karen gets to 15 January 2021, the date of her second provisional tax instalment (P2), and her accountant has still not filed her 2020 tax return, then she will not have to make a payment at P2 either. Again, the uplift amount due and payable will be $0.
Only when her accountant files the 2020 tax return will she become a provisional taxpayer. This is because the RIT for that year exceeds the $5000 threshold.
Karen’s accountant must legally file the 2020 tax return by 31 March 2021.
Assuming this is the date they intend to file the previous year’s return, then she will need to pay something at 7 May 2021 (P3).
What is the amount she should pay P3?
That's a good question. What Karen should pay at P3 really depends on how her 2021 tax year unfolds.
It will be ONE of the following:
- Nothing – if the 2021 RIT is going to be 5000 or less. This is because Karen is not a provisional taxpayer under section RC3 (1) Income Tax Act 2007 for that year. Any income tax she does owe for 2021 tax year will be due and payable at her terminal tax date because she meets the safe harbour interest concession rules found in section 120KE (1) and (2) Tax Administration Act 1994.
- The 2020 RIT uplifted by 105 percent – if she thinks the 2021 liability will be less than $60,000. Any remaining balance to settle what she owes for the 2021 tax year will be due and payable at her terminal tax date, again because she meets the safe harbour interest concession rules mentioned above.
- The expected 2021 RIT – if Karen expects this to be $60,000 or more. This is because she would fall out of safe harbour and into the rules found in section 120KBB Tax Administration Act 1994. These rules see someone who pays the uplift amount on time and in full at P1 and P2 only incur IRD interest from P3 if they have not settled their liability for the year in full by this date.
- The expected 2021 RIT – if Karen expects this to be LESS THAN the uplifted 2020 RIT. Again, the interest rules in section 120KBB will apply if what she pays at P3 turns out not to be enough to settle the actual liability for the year.
Please contact us if you have any questions about the increase to the provisional tax threshold.
We're happy to help.
Anti-money laundering requirements and tax pooling
Updated 12 October 2020
Tax Management NZ (TMNZ) must now conduct a limited form of customer due diligence on all clients as part of recent changes to anti-money laundering (AML) requirements.
As such, we will be collecting information about the taxpayers using our service and asking anyone acting on their behalf to supply some basic personal details.
We also need to see evidence that a taxpayer has an actual or expected liability at Inland Revenue (IR) before we transfer tax from our tax pool.
Transactions cannot be completed until we receive this information from you.
Information we require from a taxpayer
For a company, limited AML requires us to collect and hold information about them that is publicly available. We will obtain this information ourselves from the New Zealand Companies Office. You don’t have to do this.
For an individual or a trust, we only need information from a person acting on their behalf (see below).
What person acting on behalf means
As part of the limited AML requirement, TMNZ must collect the identity information from at least one individual who has the authority to act on behalf of a taxpayer using our service.
For tax agents, this can be either of the following:
- A partner, director or owner of your firm; or
- An agent at your firm who is linked to the taxpayer (e.g. the taxpayer’s accountant). It can also include the person who entered the transaction for the taxpayer or the person who receives email correspondence regarding the taxpayer’s transaction if this person is different from the accountant.
For a taxpayer, this can be ANY of the following:
- The taxpayer themselves, if they are an individual.
- An employee who has authority to act on behalf of the taxpayer (if they are a company).
- A trustee of the taxpayer (if they are a trust). We require a copy of the trust deed to ensure this person has authority to act.
The person above requires a TMNZ dashboard login and must either have visibility to view all taxpayers registered with your accounting firm or be linked to the specific taxpayer or transaction. This is not applicable if the taxpayer is an individual or the person acting on behalf is a trustee.
You have the option of supplying the tax agent or taxpayer identity information as part of limited AML.
Identity information we require from a person acting on behalf
TMNZ must collect the following identity information as part of the limited AML requirement if you are a person acting on behalf of the taxpayer:
- Your full legal name.
- Date of birth.
The above is required under section 15 Anti-Money Laundering and Countering Financing of Terrorism Act 2009.
Any personal information TMNZ holds about you or your clients is stored on a secure system that has been penetration tested to ensure this data will not be compromised.
Confirmation of tax liability
The limited AML requirement means TMNZ must also ascertain that a taxpayer using our service has a liability or expects to have a liability with IR before we can complete their transaction.
Proof of this can be in the form of:
- Written confirmation from a tax agent that the taxpayer is expecting to have a liability at IR. (This can be an approximation if the exact figure is not known at the time.)
- A copy of the taxpayer’s myIR transaction detail report for the relevant tax year.
- Standard uplift amounts determined from prior year RIT information. Prior year RIT information must be determined from copies of IR correspondence or written confirmation from a tax agent.
- A copy of any provisional tax estimate submitted to IR by the taxpayer.
- Any correspondence from IR showing a liability to pay in respect to the relevant tax year.
We only require confirmation of a taxpayer’s liability when we transfer funds from the tax pool to their IR account.
Does the information provided need to be verified?
A partial exemption granted to the tax pooling industry means there is no need for TMNZ to carry out the verification requirements that apply under full AML.
In other words, we DO NOT need you to provide copies of documents to substantiate the information you provide.
Full AML, including verification, is still required for refunds or sales that meet our policy thresholds.
AML has been around for a long time – why are you asking for this information now?
Previously, TMNZ only carried out AML if a taxpayer was requesting a refund or sale over a certain amount from the tax pool.
However, our AML regulator – the Department of Internal Affairs (DIA) – is making tax pooling providers hold more information about every taxpayer using our service and anyone with authority to act on their behalf.
This limited AML requirement from DIA is in response to the accounting profession being brought into the AML regime. It has been in effect since 1 July 2020.
As a reporting entity captured under the Act, TMNZ must comply with the AML regulations set out in the legislation and any other requirements issued by DIA.
Please feel free to contact us if you have any questions. We’re happy to help.
Disclaimer: This article is correct as at 12 October 2020. It is subject to change.
Increased provisional tax threshold explained
A taxpayer has no obligation to pay provisional tax for the 2020-21 income year if their liability for the previous year was $5000 or less.
In most cases, any income tax payable for the upcoming year will be due at their terminal tax date. That said, there are some exceptions to this rule.
We are mentioning the increased provisional tax threshold because there appears to be confusion about how it works as we near 28 August 2020.
Background
Earlier this year, IRD announced that it was doubling the point at which someone enters the provisional tax regime.
Previously, someone became a provisional taxpayer if their income tax liability for the previous year was more than $2500. The threshold is now $5000.
This is a permanent change. It was designed to deliver a cashflow benefit to smaller taxpayers, particularly in the wake of COVID-19. Moreover, it was one of the recommendations in the Tax Working Group's final report.
The new threshold applies for the 2020-21 income year onward.
The impact
Generally speaking, provisional tax payable for the year equals either:
- Last year’s income tax liability, plus five percent; or
- The income tax liability from two years ago, plus 10 percent (if last year’s return has yet to be filed). This mainly applies to those who have an accountant with an extension of time filing arrangement.
However, as a result of the increase to the threshold, a person who was previously paying provisional tax under the old threshold won't have to pay provisional tax for the upcoming year if their income tax liability for the prior tax period(s) was $5000 or less.
IRD estimates that around 95,000 taxpayers will benefit from this change.
Example
Someone with a 31 March balance date has the following information for the past two income years. They filed their return for the 2019-20 income year on 7 July 2020.
| Income year | Income tax liability |
| 2018-19 | $3500 |
| 2019-20 | $4000 |
As you can see, this person had an obligation to pay provisional tax in the 2019-20 income year under the old threshold. That’s because their 2018-19 income tax liability was more than $2500.
However, because their 2019-20 income tax liability is less than $5000, there is no requirement to make provisional tax payments during the upcoming year.
Where is the income tax due and payable?
Using the facts above, and assuming the income tax bill for the 2020-21 income year is less than $60,000, then everything is due and payable at the taxpayer’s terminal tax date.
This is because they fall under the safe harbour interest threshold.
For many taxpayers, terminal tax for the 2020-21 income year will be due on either be 7 February 2022 or 7 April 2022. Check with your accountant if you are unsure.
IRD will only charge interest and late payment penalties from this date if a taxpayer has not paid what they owe by then.
However, please note the interest rules will work differently if the liability is $60,000 or more.
In that situation, a taxpayer should settle what they owe for 2020-21 income year on the date that would have been their final provisional tax instalment for that year. For those with a 31 March year-end, this payment will be due on 7 May 2021.
They will incur IRD interest from this date if they fail to pay their tax by then.
Different interest rules also apply for those in their first year of business who have an income tax liability of $60,000 or more.
These can be quite complex. The reason why is the interest start date is determined by the date someone started to derive income from their taxable activity.
Please contact us if you have any questions.