Make IRD interest, late payment penalties disappear

Image: Magician

A missed or underpaid provisional tax payment often means a taxpayer is faced with a steep interest cost and potentially late payment penalties on top of what they owe.

However, tax pooling can make that go away.

A big frustration with Inland Revenue (IRD) is that it expects taxpayers to pay the correct amount of tax on the dates it sets. No ifs, no buts.

Fail to adhere to this rigid timetable or underpay and you will face the consequences.

IRD charges interest – currently seven percent – from the date the payment was due until you pay the outstanding amount.

Late payment penalties may also apply as follows:

  • One percent the day after payment was due.
  • An additional four percent if the tax amount (including late payment penalties) remains unpaid after seven days.

A tax pooling provider such as Tax Management NZ (TMNZ) operates with the blessing of IRD. It can be of assistance if taxpayers find themselves in this situation.

Where might this be useful?

In the event you missed your recent 7 May provisional tax payment – or any other instalment relating to the 2020-21 income year, for that matter – we can eliminate any late payment penalties for which you may be liable and significantly reduce the interest you pay.

You make your payment to TMNZ and we apply backdated tax that was paid to IRD on the original date(s) it was due against your liability.

The taxman treats it as if you paid on time once it processes this transaction.

This wipes any IRD interest and late payment penalties showing on your account.

You have the option of making to TMNZ a one-off payment at a date of your choosing or making regular instalment payments towards your liability over a longer period.

TMNZ gives you up to 13 months to pay your 7 May provisional tax for the 2020-21 income year.

Is your 2020 terminal tax overdue?

You still have time to use TMNZ to reduce the interest cost and eliminate late payment penalties if you have outstanding provisional or terminal tax liabilities for the 2019-20 income year.

However, you will have to act quickly.

Tax pooling legislation gives taxpayers an additional 75 days past their terminal tax date to pay their terminal tax.

If your terminal tax for the 2019-20 income year was due on 7 April 2021, you would have until 15 June to settle owe with TMNZ.

Reassessed by IRD

TMNZ can also assist with historic income tax payments and other tax types such as GST and PAYE if you receive a notice of reassessment from IRD.

You have 60 days from the date the IRD issues this notice to use tax pooling.

Please contact us if you have any questions.


Image: AIM and tax pooling

AIM and tax pooling

Image: AIM and tax pooling

Legislation prevents taxpayers from using tax pooling to pay AIM provisional tax instalments.

We are issuing this reminder as IRD notifies us they are seeing several tax pooling transactions for these types of payments.

Section RP17B (2)(a) Income Tax Act 2007 says an amount held in a tax pooling account on behalf of a taxpayer can only be used to satisfy a liability for “provisional tax other than under the AIM method”.

That means that a taxpayer using this provisional tax method is unable to use TMNZ to defer an upcoming AIM instalment or reduce their interest cost if they fail to make this payment on time or in full.

IRD will reject these transfers.

The only time an AIM user can use tax pooling is for terminal tax – for example, an amount that’s due on 7 April – or if they receive a notice of reassessment from IRD.

This is something accountants need to be aware of before signing clients up to this option.

Why IRD doesn’t allow tax pooling

IRD says it is not appropriate for taxpayers to use tax pooling for AIM provisional tax instalments because payments under this method:

  • Have certainty.
  • More closely match income flows of a business.
  • Have no exposure to IRD interest (assuming a taxpayer pays the amount due in full and on time).

The Tax Pooling Intermediary Association, of which TMNZ is a member, and Chartered Accountants ANZ disagrees with that viewpoint. They say it assumes a taxpayer has the necessary cashflow to make their payments – but that is not always the case.

You can read both sides' argument here.

Usage of AIM

Uptake of AIM has been poor since it came into effect for the 2019 income year. According to IRD figures last year, only 1100 taxpayers are using this method. That works out to be about 10 percent of those eligible.

There are two IRD articles promoting AIM this year – yet curiously neither cites the current number of active users despite waxing lyrical about the benefits. This suggests it remains low.

TMNZ’s view is AIM is compliance heavy and will only suit a small handful of taxpayers.