How to manage cashflow over Christmas

Everyone loves the middle of summer and spending time with family and friends over Christmas, but it can be a challenging time of year for many small and medium-sized Kiwi businesses.

According to a poll conducted by the Employers and Manufacturers’ Association, more than half of businesses experience cashflow constraints between January and March.

It’s hardly surprising. The period after Christmas is traditionally slow for many companies, with people away enjoying their holidays. Consumers also tend to reduce spending after the expensive Christmas and New Year period.

Businesses can come under pressure for a number of reasons. Earnings will be down if companies shut over the break, while others will feel the pinch if they have paid bonuses before the end of the year.

Considering these facts, it’s understandable that many businesses struggle to manage cashflow and make provisional tax payments on 15 January every year.

Unfortunately, the Inland Revenue doesn’t factor in these seasonal challenges. It expects payments to be made on time and charges taxpayers late payment penalties of up to 20 percent per annum and use of money interest (UOMI) if tax is not received on the due date.

Your options for managing cashflow

What are the best options for businesses that want to manage cashflow and free-up money over the summer?

Tax pooling is IRD-approved and can be used to defer provisional tax payments to a time that suits the taxpayer without incurring late payment penalties and UOMI.

This method is cheaper than using many traditional forms of finance. Rates at Tax Management NZ (TMNZ) start from below eight percent, and tax pooling doesn’t affect existing lines of credit. Also, no credit checks or security are required.

The full amount of finance doesn’t need to be paid back if less tax is owed than first thought. The finance arrangement can be easily extended as well.

How tax pooling can help

Say you want to defer a $5,000 provisional tax payment for six months. You would pay TMNZ a one-off, tax-deductible interest amount and TMNZ would arrange the $5,000 provisional tax payment on your behalf.

The interest amount is based on the amount of tax financed and the period of maturity, so in this instance, ​it would be roughly $205.

The provisional tax payment is held in an IRD account administered by the Guardian Trust. Guardian Trust instructs the IRD to transfer the tax into your IRD account when you repay the $5,000 principal in six months’ time.

The IRD treats the $5,000 provisional tax as being paid on time once the transfer is processed. It’s that simple.

Ready to ease your seasonal cashflow worries? Get in touch with our team to discuss tax pooling options today.

Find our latest resources on tax pooling and calculating tax using the Standard Uplift method here: https://www.tmnz.co.nz/calculating-provisional-tax/


How tax pooling can help your tax management

Meet Andy, a builder who has run his own business for three years. Things are going well, and he’s set to make a substantial profit in the current financial year. He’s well-paid and smart enough to set aside tax he owes with each payment. But clients don’t always pay him on time, causing some serious headaches.

Like many businesses, Andy experiences cashflow issues. He makes a profit but doesn’t always have enough funds in his account to pay provisional tax when it’s due.

What should Andy do? Grin and bear the Inland Revenue’s late payment penalties and use of money interest charges after missing his payment dates? Or seek a better option?

Luckily, Andy’s accountant Lisa ​knows all about tax pooling and how it can relieve the financial pressure.

Tax pooling explained

Andy asks his accountant how tax pooling works and some of its main benefits.

Lisa explains that tax pooling has been available to taxpayers for two decades, starting in 2003 when Tax Management NZ (TMNZ) became a registered provider with IRD.

The accountant says tax pooling has clear benefits over traditional tax management:

  • Taxpayers can choose to pay their liabilities in a time and manner that suits them, without having to worry about IRD interest and penalties.
  • They can make significant savings on use of money interest charged and eliminate late payment penalties if they miss or underpay provisional tax, or if they are reassessed by IRD.
  • When taxpayers overpay into the TMNZ tax pool, they can earn a much higher rate of interest on overpayment of funds than they would receive from the IRD.

Who oversees TMNZ’s tax pool?

Lisa assures Andy that all payments made into TMNZ’s tax pool account at the IRD are managed by an independent trustee, Guardian Trust.

Guardian Trust oversees the bank accounts into which taxpayers pay their money, as well as the transfer of funds from the TMNZ tax pool to Andy’s IRD account.

Because the tax being transferred has been paid and date stamped as at the original due date, any penalties and interest are wiped once the payment is processed by the IRD.

Companies of all sizes can use tax pooling

Tax pooling can help businesses of all sizes, from companies with thousands of employees down to sole traders. TMNZ’s tax pool is the largest and most established in the country.

Lisa’s research found two companies TMNZ has helped.

One company uses tax pooling to counteract fluctuating seasonal revenue:

“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.”

The second company uses a tax pool as they need to invest in equipment regularly.

“With a business like ours, we are investing quite heavily into assets like cars, campers, and boats. Cash upfront is important [for] us to have.”

Tax Management NZ has helped both companies manage working capital and mitigate the risk of fees and penalties.

“What is the cost of this?” Andy asks.

“Just TMNZ interest,” Lisa replies.

Tax pools can help with voluntary disclosures and audits

Lisa looks through Andy’s expected outgoings for the year. These range from the cost of living to many other expenses associated with owning a business.

The accountant realises that in a previous year, Andy made a mistake on one of his returns and must file a voluntary disclosure with the IRD.

“How can Andy get ahead with the current year if he now has to pay an additional amount of tax for a past year?” Lisa wonders.

TMNZ can assist taxpayers who owe an increased amount of tax as a result of a voluntary disclosure or audit.

Tax pooling provides 60 days from the date the IRD reassessment notice was issued to buy the tax payment he needs and send it to the IRD.

The different tax types available to purchase are historic income tax payments, deferrable tax, and agreed delay tax, as well as other tax types such as GST, RWT, PIE, FBT, NRT, and DWT.

Lisa can use TMNZ to reduce the interest and late payment penalties cost of Andy’s voluntary disclosure.

For the current tax year, Lisa can set up either a Flexitax® or Tax Finance  arrangement to give him more flexibility and time to pay (up to 75 days past his terminal tax date for that tax year).

Lisa has other clients that are medium-large taxpayers with big bills and paydays. TMNZ’s Tax Deposit product can help them.

Other advantages of tax pooling

There are several other advantages to using a tax pool:

  • Excess funds paid into the pool can either be used for future dates and any other tax types where a reassessment has not been issued.
  • There’s the option to sell surplus tax to a taxpayer who has underpaid to earn additional interest.
  • The refund process is much faster than directly through the IRD (within three to five days, and without having to file a return for the year).

Take back control

Take control of your tax management with TMNZ tax pooling — a more convenient way to meet your provisional tax obligations.

We offer solutions for all kinds of businesses and financial situations. If you’re new to paying provisional tax, check out our resources on managing tax and business cashflow here.

Ask your accountant about tax pooling options today, or get in touch with our team to find out more.

 


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 Tax Management NZ products 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.

Watch the video below to hear more from Jonathan.