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 TMNZ became a registered provider with IR.

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 IR 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 IR.
• 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 IR.

Who oversees TMNZ’s tax pool?

Lisa assures Andy that all payments made into TMNZ’s tax pool account at the IR 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 IR 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 IR.

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.”

TMNZ 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 IR.

“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 IR reassessment notice was issued to buy the tax payment he needs and send it to the IR.

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 solution 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 IR (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.

by TMNZ Blog