How to manage cashflow over Christmas
Everyone loves the middle of summer and spending time with family and friends over Christmas, but it can be a challenging time of year for many small and medium-sized Kiwi businesses.
According to a poll conducted by the Employers and Manufacturers’ Association, more than half of businesses experience cashflow constraints between January and March.
It’s hardly surprising. The period after Christmas is traditionally slow for many companies, with people away enjoying their holidays. Consumers also tend to reduce spending after the expensive Christmas and New Year period.
Businesses can come under pressure for a number of reasons. Earnings will be down if companies shut over the break, while others will feel the pinch if they have paid bonuses before the end of the year.
Considering these facts, it’s understandable that many businesses struggle to manage cashflow and make provisional tax payments on 15 January every year.
Unfortunately, the Inland Revenue doesn’t factor in these seasonal challenges. It expects payments to be made on time and charges taxpayers late payment penalties of up to 20 percent per annum and use of money interest (UOMI) if tax is not received on the due date.
Your options for managing cashflow
What are the best options for businesses that want to manage cashflow and free-up money over the summer?
Tax pooling is IRD-approved and can be used to defer provisional tax payments to a time that suits the taxpayer without incurring late payment penalties and UOMI.
This method is cheaper than using many traditional forms of finance. Rates at Tax Management NZ (TMNZ) start from below eight percent, and tax pooling doesn’t affect existing lines of credit. Also, no credit checks or security are required.
The full amount of finance doesn’t need to be paid back if less tax is owed than first thought. The finance arrangement can be easily extended as well.
How tax pooling can help
Say you want to defer a $5,000 provisional tax payment for six months. You would pay TMNZ a one-off, tax-deductible interest amount and TMNZ would arrange the $5,000 provisional tax payment on your behalf.
The interest amount is based on the amount of tax financed and the period of maturity, so in this instance, it would be roughly $205.
The provisional tax payment is held in an IRD account administered by the Guardian Trust. Guardian Trust instructs the IRD to transfer the tax into your IRD account when you repay the $5,000 principal in six months’ time.
The IRD treats the $5,000 provisional tax as being paid on time once the transfer is processed. It’s that simple.
Ready to ease your seasonal cashflow worries? Get in touch with our team to discuss tax pooling options today.
Find our latest resources on tax pooling and calculating tax using the Standard Uplift method here: https://www.tmnz.co.nz/calculating-provisional-tax/
IRD system issues affecting tax pooling
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.