IRD 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 IRD 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 Tax Management NZ (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 IRD 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 IRD 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 IRD’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 IRD on the date it was originally due. IRD 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.
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.
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.
Small Business Cashflow Loan Scheme: Do your homework first
A former economist at one of New Zealand’s largest banks has a warning for someone considering the Small Business Cashflow Loan Scheme: It could limit your future borrowing capacity.
That’s because banks may decline lending to anyone who has this type of debt on their books, as IRD may have first collection rights as a creditor if the applicant's business goes belly-up.
An overview of the scheme
Under the Small Business Cashflow Loan Scheme, the Government is offering interest-free loans of up to $100,000 to cover operating costs such as rent, insurance, utilities and supplier payments to those with 50 or fewer fulltime staff.
IRD will administer the loans. New section 7AA Tax Administration Act 1994 gives them the power to do so.
To be eligible, an applicant must show they have suffered a 30 percent reduction in revenue (à la the wage subsidy) and prove their business is viable.
The scheme will provide $10,000 to every business, plus $1800 for every fulltime employee.
For instance, a sole trader can borrow up to $11,800.
A company with 50 fulltime employees will get the full $100,000. That comprises the base loan of $10,000 and $90,000 for its staff.
The loan will be for a maximum of five years, with repayments not due in the first two years.
If a business pays the loan within the first year, no interest will apply. An interest rate of three percent applies otherwise from the start date of the loan.
Those utilising the scheme will enter a legally binding arrangement with IRD. You can find the terms and conditions of the contract here.
As at 9am on 22 May 2020, $824.516 million worth of loans had been approved and distributed to 47,664 applicants.
The scheme is available until 12 June 2020.
The implications of an IRD loan
Ex-BNZ economist Tony Alexander, speaking as part of TMNZ’s first virtual roadshow earlier this month, was asked his thoughts on the Small Business Cashflow Loan Scheme.
He says it’s important to remember it is not free money.
Anyone borrowing money from IRD should do so only to cover uncertain cashflow fluctuations over the next 12 months.
However, he has a warning for those looking to use the scheme. That is: What will your bank say the next time you approach them for core financing?
“If you do borrow [from IRD], and then you go to your bank and say you want to borrow money, they’re going to be factoring in that new debt which you have got there, debt which I’m guessing will rank higher when it comes to closing down the firm if necessary than lending to the bank,” says Alexander.
“I figured that’s why [the Government] did it through the IRD because they would have first call on the company in a closed down situation in advance of the bank, but I can’t be sure of that.”
Does IRD have priority?
Interestingly, IRD has amended the definition of ‘tax’ in various sections of the Tax Administration Act 1994 to include these loans. So yes, that gives them the necessary collection powers.
However, what is not certain is if these loans are a priority debt that move to near the front of the queue in the way that PAYE does when a business enters into liquidation.
We’re hoping Richard Owen, who is the small and medium enterprises customer segment lead at IRD, can clarify this at our next virtual roadshow on 17 June.
You can register for this event here.
Other things to note about Small Business Cashflow Loan Scheme
Below are the important terms and conditions of the scheme to note.
IRD calls the shots
IRD can change the terms of the loan contract with 30 days’ notice. It can also assign the loan to another party.
And they can audit your application at any time.
Beware the consequences of defaulting
In the case of an ‘event of default’, then the interest rate jumps to 10 percent.
This comprises the three percent someone normally faces under the scheme, plus IRD’s underpayment interest rate. The latter is currently seven percent.
At a time where the Government has stamped out loansharking, 10 percent interest is quite draconian.
An event of default can include someone:
- Breaching or not complying with any undertaking they are required to under the agreement they have with IRD.
- Failing to make payments of the loan due to the dissolution, termination, disestablishment, de-registration or winding up of a company.
- Failing to make payments of the loan due to the appointment of a liquidator, statutory manager, administrator, receiver, bankruptcy official or similar officer in respect to a person or any of their assets.
- Ceasing to carry on the business or organisation for which the loan amount was provided.
- Making any statement or providing information that is untrue, inaccurate or misleading.
See clause 9.1 of the terms and conditions document for more information about an event of default.
You will enter a payment plan after 24 months
Anyone who fails to pay their loan back within two years will put on an IRD payment plan.
From the date of the 24th month to the final repayment date (i.e. the date falling five years after the loan is made available to someone), a taxpayer must make regular instalment payments of principal and interest, as notified by the department.
Any such instalment payments will be calculated by IRD to spread the amount of the required repayments over this repayment period.
Failing to pay an instalment amount will trigger default interest.
You must remain in New Zealand
An individual borrowing money from IRD as part of the Small Business Cashflow Loan Scheme has a requirement to stay in New Zealand (other than for temporary absences like holidays) until they pay back their loan.
You must notify IRD of any changes
Anyone using the Small Business Cashflow Loan Scheme has an obligation to tell IRD if their company or organisation ceases to exist as soon as possible.
It is important you consider this if you are in self-employment.
After all, if you choose to put your business on hold and move back into an employment role, it may trigger a requirement to repay the loan.
IRD can share your information
The contract terms give IRD broad powers to share personal information with other government departments as well as debt collectors and credit agencies.
Do your homework first
We encourage anyone thinking about using the Small Business Cashflow Loan Scheme to read the terms and conditions, so they know exactly what they’re getting themselves into.
Moreover, take heed of Alexander’s warning about the impact it may have on getting a bank loan later.
However, above all else, seek expert advice about your situation before signing up to anything.