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.
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.
GST ratio timeframe extended
IRD has extended the timeframe for taxpayers to elect to use the GST ratio method in the wake of COVID-19.
They now have until 19 August 2020 or the day before the start of their 2020-21 income year, depending on which is later, to opt in.
Normally someone who is eligible to calculate their provisional tax on this basis must choose to do so before the start of their new tax year.
For example, a taxpayer with a 31 March balance date would have to inform IRD they wish to use the GST ratio method for their 2020-21 income year on or before 31 March 2020.
However, IRD recognises that COVID-19 may have made it difficult for someone to make this election within that required timeframe and has decided to grant more time.
They are also giving someone 10 working days to make their provisional tax payment(s) once they are notified of their GST ratio percentage.
If a taxpayer completes payment within that timeframe, IRD will waive any penalties and interest.
What is the GST ratio method?
The GST ratio method lets someone pay provisional tax based on a percentage of their taxable supplies.
A taxpayer can choose to use this calculation if:
- Their income tax liability for the previous year wasn’t more than $150,000.
- They file their GST returns monthly or every two months.
- They aren’t operating as a partnership or a look-through company.
IRD calculates the GST ratio percentage figure by dividing the previous year's income tax liability by the total taxable supplies for the corresponding income year.
Someone using this method pays provisional tax six times a year.
COVID-19: IRD extends tax pooling deadline
Updated 19 June 2020
Anyone impacted by COVID-19 will have 365 days after their terminal tax date to settle 2019 income tax arrangements with TMNZ, subject to meeting certain criteria.
IRD has used its new discretionary powers in s6I Tax Administration Act 1994 to extend the legislative deadline after recognising the cashflow difficulties some taxpayers face in the wake of the global virus and the Government’s response to it.
It means those with a terminal tax date of 7 April 2020 now have until 7 April 2021 to satisfy their Flexitax® or Tax Finance arrangements for the 2019 tax year.
Normally they have just 75 days after their terminal tax date to pay.
For taxpayers with a different terminal tax date, the extension to settle 2019 income tax will apply if their 75th day fell during a period that was impacted by COVID-19.
That means those with 15 January 2020, 7 February 2020, 7 March 2020 and 7 April 2020 terminal tax dates can request extra time to pay.
TMNZ welcomes IRD’s decision.
We wish to thank officials at the department for recognising the impact COVID-19 is having on our clients in relation to settling their 2019 income tax obligations within the required timeframe, as well as engaging with us to come up with a solution.
Eligibility criteria
The extension is subject to a taxpayer completing an application form and meeting a couple of conditions.
Firstly, they must have experienced – or expect to experience – a significant decline in actual or forecast revenue due to COVID-19 between January 2020 and July 2020 that either:
- Prevents them from satisfying their existing arrangement for the 2019 tax year with TMNZ within the normal legislative timeframe; or
- Meant that prior to this extension, they were unable to enter into an arrangement for the 2019 tax year with TMNZ.
If someone has received the Government wage subsidy, then this will satisfy the requirement of a reduction in revenue due to COVID-19.
If they have not, they will need to confirm that, after meeting their on-going business expenditure, they DO NOT have any of the following immediately available to pay their tax obligation:
- Cash reserves
- Insurance proceeds
- Banking facilities.
Secondly, a taxpayer must have their TMNZ arrangement for the 2019 tax year in place on or before 21 July 2020. Our recommendation is that you set this up as soon as you can.
Thirdly, they will need to supply a cashflow forecast (or other comparable information if they are a small business).
IRD is asking us to collect and check this forecast as it wants proof that the taxpayer requesting an extension will have the funds available to meet their liability within the new timeframe.
Someone must supply this forecast even if they received the wage subsidy.
Many clients and tax agents will be able to access this through their accounting software. If someone does not have a cashflow forecast template, here is one that IRD sends those wishing to enter into a payment plan.
Exception to the cashflow forecast criteria
If a taxpayer intends to settle their tax liability before 21 July 2020, they DO NOT need to provide a cashflow forecast.
Payment frequency
We CANNOT accept arrangements to delay the payment of all your outstanding tax until the last day.
IRD wants taxpayers to make regular payments towards their liability. These payments can be made weekly, fortnightly or monthly.
Please contact us if you have circumstances that will make this difficult.
We can vary arrangements part way through if required.
A taxpayer's final payment must be received no later than 365 days past their terminal tax date for the 2019 tax year.
TMNZ’s interest rates for extension arrangements are the same as they are for other transactions.
Key dates to note
The 365-day extension deadline will differ slightly for taxpayers with the terminal tax dates in bold. Please be mindful of this when completing the application form.
For those whose terminal tax date for the 2019 tax year is 15 January 2020, 365 days after this date is actually 14 January 2021.
This is because 2020 has an extra day due to being a leap year.
For those whose terminal tax date for the 2019 tax year is 7 February 2020, their actual 365th day is 9 February 2021.
There are two reasons for this.
The first is that 7 February 2021 falls on a Sunday. The second is Waitangi Day (6 February) is ‘Monday-ised’ to 8 February.
For those whose terminal tax date for the 2019 tax year is 7 March 2020, their 365th day is 9 March 2021.
This is because:
- The due date for this 2019 terminal tax payment defaulted to 9 March 2020 as the seventh was on a Saturday this year; and
- IRD has applied the 365-day extension from 9 March 2020.
The application process
You can find the extension application form here. Please complete and send this along with your cashflow forecast to support@tmnz.co.nz.
Someone can send us the completed application form immediately and provide the cashflow forecast in the next three weeks.
Don't hesitate to call
The process around this extension has been introduced at short notice, so please bear with us.
As always, if you have any questions, feel free to contact your TMNZ account manager or our customer support team. We're here to help.
Disclaimer: This article is correct as at 19 June 2020. It is subject to change. TMNZ will update this article as and when it receives new information from IRD regarding the extension of the 2019 tax pooling deadline. We encourage readers to check this page regularly.
How filing late and losing EOT impacts provisional tax payments
Losing extension of time (EOT) due to filing income tax returns late means someone can only use 105 percent of the previous year's residual income tax (RIT) when calculating their provisional tax payments.
That's because if a taxpayer fails to provide their returns(s) on time, IRD's system defaults to using the date by which they were legally due to file the return for that year – not the date on which they furnished the return.
Only if someone files their return(s) within the required timeframe will the actual date of filing be used.
This is important to remember, particularly when using TMNZ’s Tax Calculator.
An overview of IRD's system and TMNZ's Tax Calculator
When a taxpayer files their return for the most recently completed year, IRD’s system uses the lesser of standard uplift or a third of their RIT to determine the provisional tax instalment amounts due and payable for that year.
As per s120KBB (3B) Tax Administration Act 1994, the standard uplift instalment can either be the lesser of the 105 percent or 110 percent calculation. You can read more about that here.
TMNZ’s calculator follows the same logic as IRD's system.
To determine the instalment amounts due and payable, it requires a taxpayer's RIT and filing date information for the past three years:
- The current tax year or most recently completed tax year (e.g. 2020).
- The tax year prior to that (e.g. 2019).
- The tax year two years prior to that (e.g. 2018).
Whereas IRD has access to this information, we unfortunately don't. That's why we ask users to enter these details themselves.
If someone was late in providing a return and lost their EOT in any of the years before the current or recently completed tax year, then it’s crucial they know the correct filing date to use, otherwise the calculator will spit out incorrect instalment amounts.
After all, garbage in, garbage out.
Example
A taxpayer with a 31 March balance date decided to use TMNZ’s Tax Calculator to work out the provisional tax payable for the 2019 tax year. They did not pay any income tax for that year and wanted to purchase it from TMNZ to reduce their interest cost and eliminate late payment penalties.
RIT and filing date information for the past three years
| Tax Year | RIT | EOT | Legal date by which they must file their return | Date they file their return | Return status |
| 2017 | $6000 | Yes | 31 March 2018 | 1 May 2018 | Late |
| 2018 | $10,000 | No | 7 July 2018 | 16 January 2019 | Late |
| 2019 | $25,000 | No | 7 July 2019 | 30 June 2019 | On time |
As you can see, the taxpayer has lost their EOT for the 2018 tax year due to filing their 2017 return late. Their 2018 return was also late, so they don’t have EOT for their 2019 tax year either. However, the taxpayer did file the latter year’s return on time.
This means when using TMNZ’s Tax Calculator they must enter into the ‘date of filing’ field the respective legal dates by which they were required to furnish the returns for the 2017 and 2018 tax years.
For the 2017 tax year, this will be 31 March 2018 as their EOT was still applicable. For the 2018 tax year, this will be the non-EOT deadline of 7 July 2018.
Legislation states anyone who has an early balance date (i.e. the period between 1 October and 31 March) must file their return by 7 July if they do not have EOT. Those without EOT who have a late balance date (i.e. the period between 1 April and 30 September) must file their return on the seventh day of the fourth month after their year-end.
As the 2019 tax return was provided within the mandatory timeframe, the taxpayer can use the actual date on which they submitted that year’s return to IRD.
Recap: How things should look in TMNZ’s Tax Calculator
| Tax year | RIT | Date of filing |
| 2017 | $6000 | 31 March 2018 |
| 2018 | $10,000 | 7 July 2018 |
| 2019 | $25,000 | 30 June 2019 |
How this impacts provisional tax instalments
In this situation, the 2019 provisional tax instalments will be based on the standard uplift amount as this is lower than a third of the RIT for that year.
However, ALL uplift payments will be based on 105 percent of the 2018 RIT.
That’s because the taxpayer lost EOT for the 2018 tax year and, therefore, was supposed to have filed their return for that year on 7 July 2018 – before the date of their first provisional tax instalment for the 2019 tax year (this being 28 August 2018).
As such, they cannot base any payments off 110 percent of their 2017 RIT.
Therefore, the 2019 instalment amounts due and payable as per IRD's system – and what TMNZ's Tax Calculator will tell them to purchase – at each date are as follows:
- 28 August 2018: $3500
- 15 January 2019: $3500
- 7 May 2019: $3500
TMNZ's calculator will also show the taxpayer needs to purchase at their terminal tax date the final balance of $14,500 to settle the 2019 RIT, as their RIT is less than $60,000.
Please note the terminal tax date will have been 7 February 2020 due to them losing their EOT. They would have had 75 days from this date to purchase from TMNZ the 2019 income tax they require.
Don't forget the flow-on effect
It is also important to remember that because there was a requirement to file the 2019 return by 7 July 2019, the taxpayer can only use the 105 percent uplift calculation for their 2020 provisional tax payments.
Again, this is due to the filing date for the 2019 return being before the first instalment date for the 2020 year.
So, using the RIT information above, the standard uplift payments for the 2020 tax year will have been:
- 28 August 2019: $8750
- 15 January 2020: $8750
- 7 May 2020: $8750
For those using the standard uplift method, the 105 percent calculation will continue to be the only option for them to determine provisional tax payments until the taxpayer re-applies for their EOT.
Legislative references
You can find the legislation pertaining to filing dates of tax returns and EOT in s37 and s38 Tax Administration Act 1994.
Please feel free to contact us if you have any questions.
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.
UOMI remission guidance: IRD overlooks provisional tax scenario
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 significantly reduce the interest cost they face on any additional tax payable.
As always, we look forward to the department’s clarification.
Over to you, IRD.
Harrison Grierson mitigates provisional tax risk
For Matthew Fleming, provisional tax is risky business as it requires a degree of crystal-ball gazing and guesswork.
However, he chooses to mitigate that risk by depositing these payments into Tax Management NZ’s tax pool account.
It's a “no-brainer” because it gives him a better return if he overpays provisional tax and reduces his interest and late payment penalty costs if he underpays.
More about Matthew Fleming
Matthew is the chief financial officer at Harrison Grierson, one of New Zealand’s leading engineering and design consultancies.
It has offices throughout Aotearoa and predominately provides services locally, with more than 350 staff on the books.
Remarkably, the firm is blowing out 135 candles this year. No-one stands the test of time for that long if they ain’t good at what they do.
And Harrison Grierson is good at what it does. A quick peruse of the significant projects is has been associated with during its lifetime is a testament to that.
Provisional tax is 'difficult to predict'
However, like most businesses, it is not immune to the problems provisional tax poses.
Matthew admits calculating the amount of income tax Harrison Grierson must pay IRD requires guesswork as its cashflow is up and down at certain times.
He knows the lay of the land during the first quarter – but the rest of the year can go either way.
“It’s hard enough to try and guess next month’s results, but when you’re having to guesstimate your final year’s tax liability accurately, [it] does take a certain degree of crystal-ball gazing,” says Matthew.
“We try to project our income and where our costs are going to be and having to pay tax on that sort of basis is a little bit of a risk.”
Even more so when one considers the taxman’s wide interest spread. They charge 8.35 percent if someone underpays provisional tax and pay just 0.81 percent if they overpay.
In other words, provisional tax is difficult to get right and very expensive when someone gets it wrong.
How Matthew manages that risk
Matthew chooses to deposit Harrison Grierson's provisional tax payments into TMNZ's tax pool.
It's an account operated by an IRD-approved tax pooling provider that allows taxpayers to combine their payments. The overpayments from some can then be used to offset the underpayments by others.
TMNZ's tax pool account sits at IRD and is overseen by an independent trustee.
Harrison Grierson keeps its date-stamped tax deposits in this account until Matthew confirms its liability for the year. He then arranges for the transfer of these deposits to the firm's own IRD account to satisfy what they owe.
If they have surplus tax remaining, he can earn additional interest by selling this to someone who has underpaid. (This is subject to market demand, which has been severely impacted by the COVID-19 pandemic.)
Conversely, if not enough tax has been paid, Matthew can reduce the IRD interest cost and eliminate any late payment penalties Harrison Grierson faces through purchasing the tax they require from another taxpayer and applying it against the company’s own liability when he arranges their transfers from the pool.
Matthew: 'TMNZ makes provisional tax easier'
Matthew is a big proponent of the benefit TMNZ delivers when his provisional tax calculations go askew.
“[Tax pooling’s] such a great service in terms of advantaging taxpayers when they are trying to estimate their liabilities and are struggling with it,” he says.
“The ability to get a return when you have overpaid and the ability not to pay such punitive penalty rates when you have underpaid makes it a no-brainer.”
As someone who is having to estimate revenue and costs a lot, Matthew finds it useful that tax pooling gives him the flexibility and control to make payments “as we see fit” based on how the financial year is unfolding, without any considerable downside.
He also likes that he can access refunds faster – and without having to file a return. TMNZ makes it simple for him to manage the payments of the different entities belonging to Harrison Grierson as well.
Matthew recommends tax pooling to other businesses, particularly those with seasonal or volatile income.
“What makes Tax Management NZ an easy choice is it makes the whole provisional tax regime easier to deal with.”
Watch Matthew's interview below:
Coffee with Tsarina at Shore Accounting Solutions
Tax pooling is part of the strategy Shore Accounting Solutions employs to assist businesses with managing cashflow and provisional tax payments.
Tsarina Dellow (pictured above) is a chartered accountant at the two-person firm in Amberley, 45 minutes north of Christchurch.
She says paying provisional tax on dates IRD prescribes can be hard on small- and medium-sized businesses’ cashflow. That’s particularly the case during the January to May period, when the department awaits payment of two provisional tax instalments (not to mention GST).
Xero’s Small Business Insights reveal January and May are two of the most difficult months in terms of cashflow. August is another. (See a pattern here?)
Tsarina says business owners can come unstuck in this period – particularly if they’re guilty of not squirreling cash away throughout the year.
“Kiwis are often quite bad at saving. They’re not very good at putting money away in the good times, so when they have a bit of a bump – maybe a customer pays late or a supplier puts their costs up – they don’t often have that buffer there. When you don’t have that buffer, things start to go downhill and it gets really stressful for people really, really fast.”
Enter Tax Management NZ
As an IRD-approved tax pooling provider, Tax Management NZ (TMNZ) allows businesses to make their provisional tax payments when it suits them.
There is no need to worry about late payment penalties. And the interest it charges is fairer than the 8.35 percent IRD slaps someone with when they miss a payment.
Tsarina mentions this service to clients when discussing tax planning and cashflow management if she notices they’re going to encounter any difficulty at certain times of the year.
“If [TMNZ] can help them out with that, we can set a programme in place to even things out during the year,” she says.
“It delivers excellent benefits for people’s cashflow. They’re able to pay their tax as and when it suits them and their business – and they don’t have to worry about the IRD always chasing them up. If they can’t meet a provisional tax payment, they can hand it over to TMNZ and pay it when they can.”
About Shore Accounting Solutions
Tsarina has been working at Shore Accounting Solutions for four years. Her colleague Ben Shore founded the firm in 2012.
The duo is big on providing great, technical tax advice and helping North Canterbury businesses and the community grow.
You can watch our full interview with Tsarina below.
COVID-19: Additional tax relief announced
IRD will have the flexibility to change statutory tax deadlines as part of new measures announced to provide relief for taxpayers during the COVID-19 pandemic.
Plans are also afoot to introduce a temporary tax loss carry-back scheme and relax the tax loss continuity rules.
Today’s announcement by the Government recognises taxpayers require more assistance during what is proving to be a financially trying time.
It follows the tax relief measures they unveiled last month.
The Government plans to introduce legislation containing these changes during the week beginning 27 April.
Detail about the new measures is light at this stage. IRD is not answering specific questions as they’re currently engaging with the wider tax community to determine how things will work.
Nonetheless, below is a summary of what we currently know about these new tax measures.
Giving IRD the power to change deadlines
IRD will have greater flexibility to temporarily change statutory tax dates, timeframes and procedural requirements for businesses and individuals impacted by COVID-19.
This discretionary power will be introduced via an amendment to the Tax Administration Act 1994.
While IRD will publish further guidance in the coming weeks following consultation with tax advisors, this may enable them to extend the deadlines for filing tax returns and paying provisional and terminal tax.
At this stage, the power will apply for a period of 18 months.
Temporary tax loss carry-back scheme
This will allow a taxpayer expecting to make a loss in either the 2020 or 2021 tax year to estimate that loss and use it to offset profit in the previous year.
They will also receive a refund of the tax paid in the previous profitable year.
A taxpayer will be able to cash out all or some of their losses in the 2020 or 2021 tax year. Under current rules, they can only carry them forward to a year when they make a profit.
They will have the option of re-estimating their provisional tax after the date of their final instalment if they require additional time to work out any estimated loss for the 2021 tax year.
IRD will be consulting with tax advisors to ensure the law and administrative guidance are clear.
Please note the Government is also considering a permanent loss carry-back scheme. It would apply from the 2022 tax year onward.
IRD says there will be public consultation about this during the second half of 2020.
Relaxing the tax loss continuity rules
Currently, a company cannot keep its tax losses if it has more than a 51 percent change in ownership.
However, the introduction of a ‘same or similar business’ test will mean they can and help make businesses seeking investment to keep afloat during the COVID-19 pandemic more appealing to investors, thus improving their access to capital.
IRD says the criteria which must be met to satisfy this requirement is modelled on Australia’s rules. This means a company must continue in the same or a similar manner it did before any change in ownership.
Again, IRD is engaging with the tax community to ensure the law is clear.
The Government intends to pass legislation relaxing the tax loss continuity rules before the end of March 2021.
They will apply for the 2021 tax year onward.
More information
You can find out more about today’s announcement by the Government via the links below.
- COVID-19 (novel coronavirus) – tax changes to support businesses
- Supporting small and medium sized enterprises during the COVID-19 crisis
- Government backs business through COVID-19
TMNZ will continue to update you with any new tax developments relating to COVID-19.