How to overcome the pain of tax procrastination

With Inland Revenue (IRD) currently charging a penalty of seven percent interest, you would think that every single business owner in New Zealand would be highly motivated to get their tax issues sorted.

Why then, is tax procrastination a problem?

Tax is an obligation. We have no choice but to get on top of it. Whether that's paying on time if we can or, if we can't, making alternative arrangements. Solutions may include tax pooling through Tax Management NZ or reaching an agreement with IRD. However, there is a segment of Kiwi taxpayers who continue to bury their heads in the sand despite the potential pain it may cause.

However, tax procrastination, it turns out, is a 'thing' and it's not laziness either.

Dr Piers Steel, author of the book The Procrastination Equation: How to Stop Putting Things Off and Start Getting Stuff Done calls procrastination 'self-harm'. It's hard to argue with him when you consider the breath-taking tax penalty regime we face in New Zealand.

Dr Fuschia Sirois, a professor of psychology at the University of Sheffield, recently told the New York Times: “Procrastination isn’t a unique character flaw or a mysterious curse on your ability to manage time, but a way of coping with challenging emotions and negative moods induced by certain tasks — boredom, anxiety, insecurity, frustration, resentment, self-doubt and beyond”.

In short, we use procrastination to manage an immediate negative mood rather than with getting on with the task.

Beating tax procrastination

Carleton University’s Tim Pychyl suggests that the next time you feel inclined to put off something – like getting your tax sorted – you should simplify your focus down to taking the first step. The very next action helps shift your primary emotion.

“Once we get started, we’re typically able to keep going. Getting started is everything,” he says.

First tasks

Having a handful of obvious first steps you can take will help start you on that critical first step.

1. First step, get expert advice

If you are concerned about cashflow, particularly in this year marred by COVID-19, find a tax adviser (your accountant or tax consultant). Should you already have one, pick up the phone and speak to him or her about your options – even if it's to book an appointment.

Take that first step.

2. List your next steps

In partnership with your tax adviser, get an understanding of what all your options are. These may include tax pooling or coming to an arrangement with IRD for an extension, or a repayment schedule. Do you qualify for Working for Families or the temporary tax loss carry-back regime?

Knowing your options helps you put in place tangible next steps.

3. Reduce the workload

Sometimes the thought of having to gather all the bits and pieces of information we need can seem like a chore well worth postponing. To combat this, put in place a system that keeps your source of financial information at your fingertips.

One Auckland accounting firm reports that they have to chase at least 30 percent off their clients for 'bits of information' and it can take months. Most businesses are GST registered, which means that at least 90 percent of your needed business data is already available by the time you file your GST return. Almost every accounting software package on the market will likely have an app that lets you track receipts and other financial information in real-time.

According to research, procrastination (in all its guises) can be associated with high stress and related acute health problems. That's because the things we procrastinate never go away.

Avoid the costs of tax procrastination. Know what steps you're going to take and start taking them today.


IRD eyeing cryptoassets: Tax implications for investors

Image: Cryptoassets

Come clean or expect Inland Revenue (IRD) to come calling.

For investors who are unaware of their tax obligations, this is the situation they face in the wake of the New Zealand tax department exercising its powers under the Tax Administration Act 1994 to request customer information from companies dealing with cryptoassets.

This appears to be part of a OECD initiative. The intergovernmental economic organisation recently released a comprehensive overview of the current tax treatment and tax policy gaps across the main taxes applicable to cryptoassets. This report looks at more than 50 jurisdictions, including all G20 and OECD nations.

IRD says it wants to help people get things right from the start.

It will not be surprising if investors receive a letter reminding them of their obligations and encouraging them to fess up if they have failed to disclose any income made from cryptoassets.

And investors would be wise to take heed of this correspondence.

After all, the information requested from cryptoasset companies includes customer blockchain wallet addresses and transactions until 31 March 2020.

It’s this type of data that may enable IRD to find other cryptoasset exchanges someone uses –  even if those exchanges are based overseas –  and compare the profile of cryptoasset investors against the position taken in their tax returns to see if there are any anomalies.

Don’t underestimate the department either. Its investigation staff are very effective at using this type of information to connect the dots. Just look at their work in the ‘Hidden Economy’.

What will be fascinating to see is just how much tax IRD is able to recover.

It has the potential to be quite a significant sum as the tax implications of cryptoassets do not appear to be widely understood by investors.


Tax treatment of cryptoassets

IRD treats cryptoassets as property for the purposes of tax, so normal income tax rules apply.

Its default view is that most people acquire cryptoassets with the intention of selling them. That’s because cryptoassets don’t pay interest and it’s only upon disposal that someone will realise a return on their investment.

This is very similar to its position on gold.

As such, in most cases, the profit an investor makes from disposing or exchanging cryptoassets is taxable.

To determine if tax is payable, IRD will look at the main purpose for acquiring cryptoassets at the time of acquisition.

Unless a person can provide clear and compelling evidence that shows they did not acquire cryptoassets with the intention of selling them, they must pay tax.

It does not matter how long someone plans to hold on to cryptoassets for before selling or exchanging them. A person’s main purpose can still be to sell or exchange them, even if it takes a several years for them to do so.

Cryptoasset income must be included as ‘other income’, business income or self-employed income in tax returns.

People must also keep accurate and complete cryptoasset records. They must hold these for at least seven years.

You can find more information on IRD’s website. It recently issued updated guidance on the tax treatment of cryptoassets.

This is a useful starting point and explains how it sees the rules applying for individuals and businesses. They even provide a few examples, too.

We strongly recommend you cast your eyes across this.


What to do now?

Investors would be wise to weigh up their next move now that IRD is looking further into cryptoassets.

The first thing to do is to speak to an accountant if you are unsure of your tax obligations. After all, this is a complex area and specialist advice should be sought.

In the event someone discovers they do have tax to pay on the profit they made from selling, trading, exchanging, mining or staking cryptoassets, they should consider making a voluntary disclosure.

The consequence of not disclosing taxable income can be brutal, with IRD charging shortfall penalties of up to 150 percent of the tax liability and usurious interest. The latter is currently seven percent, although has been much higher.

However, the truth shall set you free.

Making a voluntary disclosure can see shortfall penalties eliminated. Even if IRD has notified someone of an impending audit, there is still a possibility of a 40 percent reduction in shortfall penalties if someone comes clean before the investigation commences.


Reduce the interest cost with tax pooling

An IRD-approved tax pooling provider such as Tax Management NZ (TMNZ) can be used to reduce the interest cost significantly, if someone owes additional income tax due to failing to disclose the profit they made from their cryptoassets.

TMNZ lets someone apply tax that was paid to IRD on the original due date(s) against their liability.

As such, IRD treats it as if they paid on time once it processes this tax pooling transaction. This eliminates any late payment penalties. Please note the legislation prohibits tax pooling from assisting with shortfall penalties.

For the current tax year (2021) or one just completed (2020), someone has up to 75 days past their terminal tax date for that tax year to pay the additional income tax they owe via TMNZ.

In the event a person receives a notice of reassessment from IRD due to an audit or voluntary disclosure, they can use TMNZ to reduce the interest cost on the difference between the original assessment amount and the reassessment amount.

We can assist with provisional and terminal tax, and other tax types such as GST, PAYE and FBT when there’s a reassessment.

Someone has up to 60 days from the date IRD issues the reassessment notice to pay the tax they owe via TMNZ.

Please contact us if you have any questions about tax pooling. We’re happy to help.

 


Image: Anti-money laundering

Anti-money laundering requirements and tax pooling

Image: Anti-money laundering

Updated 12 October 2020

Tax Management NZ (TMNZ) must now conduct a limited form of customer due diligence on all clients as part of recent changes to anti-money laundering (AML) requirements.

As such, we will be collecting information about the taxpayers using our service and asking anyone acting on their behalf to supply some basic personal details.

We also need to see evidence that a taxpayer has an actual or expected liability at Inland Revenue (IR) before we transfer tax from our tax pool.

Transactions cannot be completed until we receive this information from you.

Information we require from a taxpayer

For a company, limited AML requires us to collect and hold information about them that is publicly available. We will obtain this information ourselves from the New Zealand Companies Office. You don’t have to do this.

For an individual or a trust, we only need information from a person acting on their behalf (see below).

What person acting on behalf means

As part of the limited AML requirement, TMNZ must collect the identity information from at least one individual who has the authority to act on behalf of a taxpayer using our service.

For tax agents, this can be either of the following:

  • A partner, director or owner of your firm; or
  • An agent at your firm who is linked to the taxpayer (e.g. the taxpayer’s accountant). It can also include the person who entered the transaction for the taxpayer or the person who receives email correspondence regarding the taxpayer’s transaction if this person is different from the accountant.

For a taxpayer, this can be ANY of the following:

  • The taxpayer themselves, if they are an individual.
  • An employee who has authority to act on behalf of the taxpayer (if they are a company).
  • A trustee of the taxpayer (if they are a trust). We require a copy of the trust deed to ensure this person has authority to act.

The person above requires a TMNZ dashboard login and must either have visibility to view all taxpayers registered with your accounting firm or be linked to the specific taxpayer or transaction. This is not applicable if the taxpayer is an individual or the person acting on behalf is a trustee.

You have the option of supplying the tax agent or taxpayer identity information as part of limited AML.

Identity information we require from a person acting on behalf

TMNZ must collect the following identity information as part of the limited AML requirement if you are a person acting on behalf of the taxpayer:

  • Your full legal name.
  • Date of birth.

The above is required under section 15 Anti-Money Laundering and Countering Financing of Terrorism Act 2009.

Any personal information TMNZ holds about you or your clients is stored on a secure system that has been penetration tested to ensure this data will not be compromised.

Confirmation of tax liability

The limited AML requirement means TMNZ must also ascertain that a taxpayer using our service has a liability or expects to have a liability with IR before we can complete their transaction.

Proof of this can be in the form of:

  • Written confirmation from a tax agent that the taxpayer is expecting to have a liability at IR. (This can be an approximation if the exact figure is not known at the time.)
  • A copy of the taxpayer’s myIR transaction detail report for the relevant tax year.
  • Standard uplift amounts determined from prior year RIT information. Prior year RIT information must be determined from copies of IR correspondence or written confirmation from a tax agent.
  • A copy of any provisional tax estimate submitted to IR by the taxpayer.
  • Any correspondence from IR showing a liability to pay in respect to the relevant tax year.

We only require confirmation of a taxpayer’s liability when we transfer funds from the tax pool to their IR account.

Does the information provided need to be verified?

A partial exemption granted to the tax pooling industry means there is no need for TMNZ to carry out the verification requirements that apply under full AML.

In other words, we DO NOT need you to provide copies of documents to substantiate the information you provide.

Full AML, including verification, is still required for refunds or sales that meet our policy thresholds.

AML has been around for a long time – why are you asking for this information now?

Previously, TMNZ only carried out AML if a taxpayer was requesting a refund or sale over a certain amount from the tax pool.

However, our AML regulator – the Department of Internal Affairs (DIA) – is making tax pooling providers hold more information about every taxpayer using our service and anyone with authority to act on their behalf.

This limited AML requirement from DIA is in response to the accounting profession being brought into the AML regime. It has been in effect since 1 July 2020.

As a reporting entity captured under the Act, TMNZ must comply with the AML regulations set out in the legislation and any other requirements issued by DIA.

Please feel free to contact us if you have any questions. We’re happy to help.

Disclaimer: This article is correct as at 12 October 2020. It is subject to change.


Image: IRD system

IRD system issues affecting tax pooling

Image: IRD system

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.


Image: Pay your tax now here!

COVID-19: How tax pooling can still help taxpayers

IRD may be taking a more flexible approach in terms of its interest (UOMI) remission for taxpayers grappling with the financial impact of COVID-19 – but any request for relief will still be at its discretion and on its terms.

As such, an IRD-approved tax pooling provider such as Tax Management NZ (TMNZ) can assist with provisional tax this month if someone:

  • Misses out on a remission of UOMI.
  • Wants greater payment flexibility to manage cashflow during this difficult time than what they'll receive if entering an IRD arrangement.
  • Prefers not to deal with the taxman.

IRD: ‘If you say you can’t pay, we’ll believe you’

During a Chartered Accountants Australia and New Zealand webcast last month, IRD said they will take a taxpayer at their word if they tell them they cannot pay tax on time due to COVID-19 and accept most applications to waive UOMI if they are for no more than two years from the date the legislation was enacted (this being 25 March 2020).

Taxpayers DO NOT need to have exhausted all financing options before seeking assistance either.

This indicates IRD will be more flexible in its remission of UOMI. It was certainly a different tone to what was found in the general guidance document they issued last month.

And that’s not a bad thing for those reeling from the effects of COVID-19.

Our view

However, we believe the department's approach to the remission of UOMI will fall somewhere in the middle. It won't be as heavy-handed as their general guidance suggest, nor will it be a no-questioned-asked waiver for all.

As such, with provisional tax instalments due on 7 May and 28 May, we explain how tax pooling can be of assistance to taxpayers who are short on cash given the current economic climate.

Below we compare the service to IRD’s remission of UOMI.

Tax pooling offers more flexibility

With Flexitax®, taxpayers have the complete flexibility to pay what they want, when they want for up to 13 months.

While IRD is applying a high-trust approach in terms of applications and offering a remission of UOMI until 25 March 2022, it may still determine the type of payment arrangement it strikes with a taxpayer, the length of that arrangement and the date(s) by which someone must make payment(s) after it reviews someone's request.

There is also an expectation for anyone seeking relief to pay the tax they owe as soon as practicable. Remember, this is not a tax holiday. Only in extreme circumstances will someone be granted 22 months to pay.

If someone cannot honour their arrangement, they will need to contact IRD to renegotiate an extension or request a write-off. They will have to show they've made every possible effort to pay their liability by the agreed date. Whether someone is granted an extension or write-off will come down to IRD’s discretion.

Given that, even though TMNZ interest applies during any Flexitax® arrangement, some may find paying this negligible seeing as it gives them the freedom to manage cashflow by letting them make payments as and when it suits them, rather than having to meet the rigid terms of IRD’s payment arrangement.

A taxpayer has 75 days past their terminal tax to settle any 2020 income tax they owe with TMNZ. They only pay for the tax they require and can easily amend the arrangement to reflect this.

TMNZ’s interest cost can be significantly lower than the 8.35 percent IRD currently charges when someone misses a tax payment. It is very competitive in comparison to most other forms of credit or finance.

And with tax pooling able to eliminate late payment penalties, this makes us the next best option for anyone wanting the flexibility to manage their cashflow.

Tax pooling is easier to arrange

Someone can complete a Flexitax® request in less than five minutes by phoning TMNZ or via their online dashboard. If emailing us, we can have the arrangement ready to go within five hours of receiving someone’s correspondence.

It is also light touch in terms of organising. After all, approval is guaranteed, and no security or financial information is required.

The only thing TMNZ needs is a taxpayer’s IRD number.

Compare that to IRD.

A taxpayer applying for a remission of UOMI will require some financial documentation before they make their submission. While IRD may not ask for this information in all situations – they say it will only be in cases of serious hardship where someone is requesting a write-off of the tax they owe– it’s important to have it ready just in case.

IRD will not finalise and approve anything until it completes a review of the application. That can take three working days or more.

The department is also experiencing unprecedented query volumes right now due to COVID-19, so this may mean getting a response takes longer.

Tax pooling is your safety net

We encourage those seeking IRD relief to enter a Flexitax® request just to be on the safe side.

That’s because there are no guarantees IRD will accept someone’s application for UOMI remission. Again, discretion is key.

If the department accepts the request for relief, then great. There’s no obligation to complete the arrangement.

On the other hand, if IRD declines someone’s request for a remittance of UOMI, a taxpayer can rest safe in the knowledge that they have a way to defer their upcoming 2020 provisional tax payment until June next year, while eliminating late payment penalties and reducing their interest cost.

Please contact TMNZ today if you wish to know more about Flexitax®.


Coffee with Maria from The Tax Lady

"Why would IRD allow you to do this?"

This is the reaction of some of Maria Anderson's clients when they hear about how tax pooling can help with provisional tax payments for the first time.

Maria is one of the Directors at The Tax Lady in Upper Hutt, north of Wellington.

Their clients range from small businesses to sole traders through to construction workers. Fluctuating cashflow comes with the territory, and Flexitax® gives them more time to their provisional tax and when it suits their cashflow.

'Pub meetings' with friends and using accounting software without a chartered accountant examining it for gaps can leave a business in a vulnerable place. These stories are what drives Maria to help her clients understand how the tax regime works so they can comprehend the risk of missing or underpaying their tax to IRD.

She believes that if they know what legislation says in plain English and understand the options available through tax pooling well enough, they can make an informed decision.

"Once you explain it, it all falls into place."




Image: 15 January provisional tax

Don't let 15 January provisional tax cause stress

Image: 15 January provisional tax and cashflow.

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 IRD-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.

Only IRD can be so cruel to have provisional tax due on 15 January – and then flog a taxpayer with its interest (currently 8.35 percent) and late payment penalties if they fail to pay on time.

Pay 15 January provisional tax when it suits you

An IRD-approved tax pooling provider such as TMNZ offers provisional taxpayers payment flexibility, without having to worry about IRD 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 IRD 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 IRD account on behalf of that taxpayer to the taxpayer’s IRD account.

As this deposit carries a date stamp as at the date it was made, IRD will recognise it as if the taxpayer paid their 15 January provisional tax on time once it processes this transfer. This will eliminate any IRD 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 IRD account an amount of the date-stamped tax deposit that matches the amount of every part payment they make until they satisfy their liability.

IRD 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 the 8.35 percent IRD 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.

Other options for 15 January provisional tax and how tax pooling compares

Another possibility is setting up a payment plan with IRD.

However, as part of this process, you will need to supply financial information and details around the timeframe you expect to settle your liability. IRD 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.


Image: Accounting Income Method (AIM)

Accounting income method: When cashflow doesn't match accounting profit

Image: Accounting Income Method (AIM)

IRD’s marketing material boasts the accounting income method (AIM) means taxpayers only pay provisional tax when they make a profit.

But what it neglects to convey is what happens if an AIM
user making a profit has no money in their bank account to pay tax when it is
due.

The answer? Bad things. IRD charges interest and penalties – and there is very little they can do to mitigate the financial consequences.

Tax pooling, for instance, is not available to them. (We’ll explain IRD’s rationale as to why it isn't further on in this article.)

Indeed, an issue with using accounting profit as the basis of AIM payments is it assumes a taxpayer has the necessary cashflow to pay tax.

As those earning income from business activity know, that is
not always the case.

For instance, take a business that concludes the sale of a
large piece of equipment and finishes installing it. They will derive the
income for tax purposes at that time.

However, if the customer significantly delays payment or the
terms of supply mean the customer will pay the price over many months, the business
will not have the cashflow to pay provisional tax.

As such, they will incur steep IRD interest (soon to be 8.35 percent) and late payment penalties if they fail to pay the taxman on time.

Now if the taxpayer was using another method to calculate their provisional tax payments, they will have the ability to use tax pooling to make this payment when it suits their cashflow.

No worries. All good in the prov. tax hood.

But those using the accounting income method DO NOT enjoy this luxury. Legislation prevents them from using tax pooling. (Tax pooling can only help with terminal tax or reassessments if a taxpayer is using AIM.)

This hardly seems fair, does it?

Is it right IRD restricts the use of tax pooling for accounting income method taxpayers?

It was something the Tax Pooling Intermediary Association, of which TMNZ is a member, brought to officials’ attention when they were seeking submissions in 2016.

They felt the absence of any fallback mechanism such as tax
pooling will put additional stress on taxpayers to pay a liability under AIM
when they may not have enough cash.

“This type of situation is inconsistent with the policy
intent of easing the burden on taxpayers and encouraging them to pay the right
amount of tax at the right time without incurring penalties and could easily be
mitigated by allowing tax pooling to be used with the AIM method.

“Feedback we have received from engaging with our SME
clients is that the most important factor they have to deal with when paying
taxes is cashflow.”

Chartered Accountants ANZ echoed similar sentiments in its submission, saying IRD’s analysis on AIM “ignores the cashflow element to a business”.

As an example, they cite a company that makes strong sales –
but may not have the funds to pay provisional tax if debtors are not paying or if
the owner is re-investing cash to grow the business.

“There is no reason to exclude AIM taxpayers from tax
pooling.

“Tax pooling will enable the AIM taxpayer to meet their obligations without incurring IRD interest or penalties. Denying AIM taxpayers this flexibility at times when cashflow is tight is poor design.”

IRD’s position on AIM and tax pooling

In reply, IRD felt it was not appropriate for taxpayers to use tax pooling for AIM provisional tax payments.

That’s because payments under the accounting income method
have certainty, more closely match the income flows of a business and have no exposure
to IRD interest (assuming a taxpayer pays the amount due on time of course).

“The use of tax pooling for provisional tax payments throughout the income year provides certainty to taxpayers when payments are uncertain. It also assists in situations when provisional tax payments made under the estimate or uplift methods are not matched to the income flows of the business.

“Officials therefore believe that AIM effectively removes any benefit to a business from using tax pooling during the income year.”

They argue mismatches in cashflow to tax payments occur when tax adjustments move the taxable profit further away from accounting profit. Under the accounting income method, there is “minimal movement” away from accounting profit.

Moreover, IRD feels taxpayers could use their standard banking facilities if they have cashflow concerns.

If cashflow problems were to persist, they can choose to use a provisional tax method that better aligns with their cashflow.

“Pooling itself does not operate as a pure financial
institution with regard to the short-term loans, rather it facilitates the sale
and purchase of tax paid at different dates.”

However, the Tax Pooling Intermediary Association says pooling is more than just the sale and purchase of tax at different dates and IRD is missing the point.

 “Tax pooling has evolved … and is now used extensively by taxpayers as a cashflow management tool, to enable them to pay their income tax when cashflow from their business allows.”

The fact of the matter

Whatever someone agrees or disagrees with IRD's stance, the fact remains the same.

Taxpayers using the accounting income method must be aware
of the potential consequences they face if they are making profit but have insufficient
cash to pay tax.

And as they cannot use tax pooling to defer AIM payments if they are experiencing a cashflow problem, they need to consider if it is the right option for them. It can also be quite a compliance-heavy method, especially for taxpayers with significant year-end adjustments.

In other words, do not take IRD's marketing spin as gospel.


Coffee with Ann from Q2 Accountants

Have you ever wanted to sit down with an accountant and discuss topics related to business and provisional tax in depth? We were given the opportunity to do just that with Ann Cooper Smith, the Founder & Chief Executive of Q2 Accountants.

If you don't know who Ann is, she is a chartered accountant with 30 years experience in the public sector. The combination of her personal experience and passion for seeing businesses thrive are what give her a personalised approach to the questions we asked. A handful of those questions are below:

  • What are Q2 trying to achieve for its customers?
  • What should a business look for in an accountant?
  • How does tax pooling provide solutions for your clients?

You will hear how Ann has learned how to use tax pooling creatively for her clients so they can further invest in their businesses while paying their provisional tax.

Take some time today to watch this video as it will give you some framework on how success can be achieved through smart planning.




Cashflow survival: Dealing with terminal, provisional tax

Image: Cashflow survival - dealing with terminal, provisional taxThe months of April and May can really tax your cashflow.

Let me explain.

On 7 April, IRD expects you to pay terminal tax for the 2018 income year.

Terminal tax means a taxpayer did not pay enough provisional tax for the previous year. As such, they need to square up the difference.

To make matters worse, IRD may also be applying interest of 8.22 percent to this underpayment.

A month later, IRD will ask for more tax to be paid. This time it will be a taxpayer’s final instalment of provisional tax for the 2019 tax year.

So not one income tax payment, but potentially two. It’s hardy ideal, is it?

The cashflow challenges presented by this tax double-whammy can be a worry.

But don’t fret. Keep calm and cool. Here’s what you can do to survive the taxing months of April and May.

Don’t let the 7 April terminal tax become, er, terminal

Deal with the terminal tax first as its the oldest tax debt.

If you do not do so by 7 April, late payment penalties will kick in. You will also register a blip on the radar of IRD’s debt collection team.

That’s the last thing you want.

What if IRD is already charging interest on the terminal tax due?

You can make significant savings by paying through an approved tax pooling intermediary.

They do this by applying surplus tax paid to IRD on the date it was originally due against your liability. IRD treats this as if you paid on time, eliminating any interest and late payment penalties incurred.

They also offer an additional 75 days past your terminal tax date to settle your 2018 terminal tax.

Review your 2019 year

For many, their financial year ended on 31 March. The 7 May instalment of provisional tax is the final payment for the 2019 tax year.

Given this, you will have a rough idea if you have overpaid or underpaid income tax. Review how your business performed and adjust your payment accordingly.

After all, there is no point paying more tax than you need to, right?

Manage cashflow by paying 7 May prov. tax at a time that suits you

According to Xero’s 2018 Small Business Insights, only 42.8 percent of small New Zealand businesses were cashflow positive in May. That’s not as bad as January, but it can still be a difficult time for some.

If paying provisional tax is likely to trigger a cashflow squeeze, tax pooling can offer some payment flexibility.

It gives you the option of:

Both payment plans reduce IRD interest costs and eliminate late payment penalties.

Don’t forget

As always, make sure you have a chinwag with your accountant. The sooner, the better.

A good accountant can help you plot a course of attack and recommend solutions which work best for your business.

So, there you have it. A few pointers on what to do to ensure April and May do not tax your cashflow.

TMNZ is New Zealand’s largest tax pooling provider. For more information on how it can assist with paying provisional and terminal tax, check out our FAQs. Alternatively, phone 0800 829 888 or email our Client Services team if you have any further questions.