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.
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, Inland Revenue's (IR) 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 IR's system and TMNZ's Tax Calculator
When a taxpayer files their return for the most recently completed year, IR’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 IR'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 IR 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 IR.
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 IR'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 welcome to contact us if you have any questions.
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 TMNZ's tax pool.
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 it 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 Inland Revenue (IR) 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.
Matthew says:
“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. 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. As at the time of writing, 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 IR-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 IR 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 IR 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 (subject to market demand).
Conversely, if not enough tax has been paid, Matthew can reduce the IR 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.
He says:
“[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. 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 TMNZ an easy choice is it makes the whole provisional tax regime easier to deal with.”
Contact our team to learn how you too can take advantage of tax pooling.
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 is a chartered accountant at the two-person firm in Amberley, 45 minutes north of Christchurch.
She says paying provisional tax on dates Inland Revenue (IR) 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 TMNZ
As an IR-approved tax pooling provider, 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 what IR charges 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 IR 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.
Standard uplift: When 105 percent uplift payments are less than 110 percent payments
Inland Revenue (IR) will sometimes apply the 105 percent standard uplift calculation (CY-1) retrospectively when determining what's due and payable at each provisional tax instalment.
This happens in situations where CY-1 payments turn out to be less than 110 percent uplift payments (CY-2).
When this is the case, IR's system will automatically overwrite the CY-2 calculation once a taxpayer files their return for the previous year.
It will apply what's payable as per the CY-1 calculation to any earlier instalment(s) prior to the date of filing that return. See below.
| Example - uplift instalments for 2020 tax year when 105 percent is less than 110 percent A taxpayer with a 31 March balance date with the following information: 2018 RIT: $35,000 The standard uplift payments due and payable for the 2020 tax year are as follows: 28 Aug 19: $7700 |
TMNZ’s Provisional Tax Calculator also applies this logic when taxpayers enter their residual income tax (RIT) and filing date information.
As you can see, this benefits standard uplift taxpayers.
What if 105 percent is GREATER THAN 110 percent?
When this applies, uplift can be calculated based on the lower CY-2 amount for any instalment(s) due prior to the date the previous year’s return is filed.
This is based on the premise that a taxpayer cannot pay an amount they do not know about and ensures they are not significantly underpaid based on their total uplift amount.
| Example - uplift instalments for 2020 tax year when 105 percent is GREATER THAN 110 percent A taxpayer with a 31 March balance date with the following information: 2018 RIT: $0 The standard uplift payments due and payable for the 2020 tax year are as follows: |
Legislative change to reflect this approach to standard uplift
IR's legal team feels the legislation is not clear in regards to overwriting CY-2 with CY-1 when the latter is lower. As such, there is an amendment in the Taxation (Kiwisaver, Student Loans, and Remedial Matters) Bill that will align the legislation with what the department is doing operationally.
The Bill is due to have its second reading.
Please feel free to contact TMNZ if you have any questions about this.
Be sure to download our free guide on calculating provisional tax using the standard uplift method if you haven't done so.
Jucy Rentals Group say good bye to provisional tax stress
They say you can't make an omelet without breaking some eggs. In this context, a company cannot grow without taking some risks or investing in their business.
Jucy Rentals Group's day-to-day operations highly depend on cash in the bank. It faces a unique challenge when it comes to paying provisional tax. They have to account for two things:
- The seasonality of business with summertime as their peak period
- Investing into their products regularly.
The company's CFO, Jonathan Duncan, found a way to manage cashflow by using TMNZ tax pooling solutions Tax Deposit, Tax Finance and Flexitax to create structure around outgoing payments during the year.
The strategy is simple: Pay into the TMNZ tax pool using Tax Deposit when the cash is available; then if any top ups are required, pay through the tax pool with Flexitax or Tax Finance.
"It gives us the ability to manage our cash flows around that as to what works for us rather than trying to fit in with the timeframes of Inland Revenue and that is a big benefit for us," explains Jonathan.
Jucy Group have settled into the benefits of tax pooling through TMNZ.
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.”
Five essential accounting tips for small and medium businesses
Getting the right small business accounting advice is vital for the success and growth of your small business. Here are five essential tips to help organise accounting for your small business.
Keep a record of tax deadlines
Knowing when business taxes are due throughout the financial year is crucial for the health of your small business. If you miss an important deadline, you could receive a costly penalty.
In New Zealand, staying on top of GST returns and paying provisional tax on time is especially important.
Inland Revenue (IR) has resources available to remind you of these important dates. You can also check out our provisional tax calendar to see your terminal tax and provisional tax dates. It is important to be proactive about tracking these yearly deadlines to meet your ongoing tax obligations.
Make the most of automated accounting software
Automated accounting software can be a lifesaver for small businesses. Accounting software covers many of the fundamentals of running a small business. This software helps keep track of expenses and automatically generates forms and reports about your business. This lightens the load of your day-to-day accounting practices.
TMNZ is integrated with accounting software such as Tax Lab to make it that much easier and convenient to use tax pooling if a payment has been missed. To get the most out of accounting software, we would recommend a chartered accountant look over the specifics of your business for any gaps that may have inadvertently been overlooked.
Know your limits and hire a professional when necessary
Many small to medium business owners try to tackle bookkeeping on their own to save costs. But in the end, making errors or filing expenses incorrectly could prove costlier than hiring a professional.
Maintain a relationship with a chartered accountant who can help keep your books tidy. A reliable accountant can help you arrange tax pooling for your business. Tax pooling provides you with more control and flexibility to manage tax payments and can save your business money from late payment penalties and use of money interest.
You may only need your accountant’s services several times a year. However, having a professional on hand for accounting advice gives you precious peace of mind that your accounting is in order.
Don’t get caught out by unexpected costs
The longer your business is in operation, the more likely you are to face a large, unexpected cost. For example, you may find yourself needing to repair or upgrade your business’ equipment. This is costly, but unavoidable for your business to operate.
An unexpected cost could even come in the form of an opportunity to grow your business, such as a market gap that you could fill perfectly. Taking advantage of such opportunities requires up-front investment.
In either case, expect the unexpected and put money aside to cover unforeseen operational costs. Or consider using your tax payments as a line of credit with Tax Drawdown.
This is sound advice for any small business. Doing so will save you the headache of scrambling to cover a significant bill or missing out on the chance to grow your business.
TMNZ is trusted by thousands of Kiwi small and medium-sized businesses. We are the leading tax pooling provider in New Zealand and work closely with IR to ensure our services are secure and reliable.
Get in touch with our team today for tax pooling and provisional tax payment advice.
First year of trading and provisional tax
What are a taxpayer’s provisional tax obligations in their first year of trading?
This is a question we receive a lot. In fact, there is certainly a lot of confusion out there.
As most know, their first year of trading is not tax-free. However, when income tax is due and payable depends on a taxpayer’s residual income tax (RIT) for the year and if they are a 'new provisional taxpayer'.
So, with that in mind, we explain below how the provisional tax rules work for the 2018 tax year onwards.
First year of trading: RIT is less than $60,000
Any income tax due for the year is due on your terminal tax date.
Interest will apply from this date if a taxpayer does not pay by then.
However, if the RIT is more than $5000 in their first year of trading, they will be a provisional taxpayer for the following year.
First year of trading: RIT is $60,000 or more
Inland Revenue (IR) may charge interest if you fall into the ‘new provisional taxpayer’ category.
The new provisional taxpayer criteria are different for individuals and companies/trusts.
Individuals are a new provisional taxpayer if:
- Their RIT for that tax year is $60,000 or more
- Their RIT in each of the four previous tax years was $5000 or less
- They stopped receiving income from employment and started to receive income from a taxable activity during that tax year.
Companies/trusts are a new provisional taxpayer if:
- Their RIT for that tax year is $60,000 or more
- They did not receive taxable income from a taxable activity in any of the four previous years
- They started receiving income from a taxable activity during that tax year.
Please take note of the different criteria for individuals and companies/trusts. This catches taxpayers out.
It is important to mention the term 'taxable activity' has the same meaning as it does in section 6 Goods and Services Tax Act 1985. However, for the purposes of provisional tax, the exclusion in the Act pertaining to GST-exempt supplies does not apply.
As such, determining if you are a new provisional taxpayer can be tricky in some instances.
From what instalment(s) will IR charge interest for new provisional taxpayers?
IR may charge interest (see the current rate here) on the number of provisional tax payments a taxpayer could have made during the first year of trading if you meet the new provisional taxpayer criteria.
Of course, that number depends on the date on which their business starts trading.
For someone with a 31 March balance date, refer to the table below.
| If a taxpayer’s first year of trading starts… | Then the number of provisional tax instalments payable is… |
| Before 29 July | Three (28 Aug, 15 Jan and 7 May) |
| On/after 29 July but before 16 December | Two (15 Jan and 7 May) |
| On 16 December or any time after that | One (7 May) |
These dates will differ if your balance date isn't 31 March or you file GST returns on a six-monthly basis.
The amount due at each provisional tax instalment
So, what happens if you meet the new provisional taxpayer criteria in your first year of trading?
Well, put simply, IR will divide your RIT for the year by the number of instalments you were liable to pay per the table above.
For instance, say your business starts trading on 1 October and your RIT for the year was $69,000.
IR will charge interest from two provisional tax dates: 15 January and 7 May. The amount on which interest will accrue at each date will be $34,500.
On the positive side, late payment penalties will not apply.
Reducing exposure to IR interest
Taxpayers may wish to make provisional tax payments in their first year of trading to mitigate their exposure to IR interest if they expect their RIT is going to be $60,000 or more.
If they are an individual or a partner in a partnership and meet certain criteria, they may also get an early payment discount of 6.7 percent on these payments.
TMNZ’s Flexitax lets you reduce the IR interest cost on the tax owing by a significant amount.
This is done 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.
This article has been written in general terms only. You should not rely upon this to provide specific information without also obtaining appropriate professional advice after detailed examination of your situation.