Miscalculated your tax loss carry-back? Don’t worry – help is at hand
Tax pooling can reduce the interest cost a taxpayer faces significantly, if they have overestimated their loss under the temporary tax loss carry-back scheme.
Under the temporary Inland Revenue (IRD) scheme, those who expect to make a loss in the 2019-20 or 2020-21 income year can estimate that loss and use all (or a portion of it) to offset the profit made in the previous year.
A taxpayer can carry their loss back one year. For example, that would mean:
- Losses from 2019-20 income year can be carried back to the 2018-19 income year.
- Losses from the 2020-21 year can be carried back to the 2019-20 income year.
More information about the scheme and how it works is available here.
One of the major downsides of the loss carry-back scheme is a taxpayer falls outside of the IRD interest concession rules that apply for provisional taxpayers using the standard uplift method. This is because they must switch to the estimation method when determining the tax loss they wish to carry to back.
What happens if someone overstates their loss and receives a greater refund of tax for which they are eligible?
It means that normal IRD interest rules will apply for underpaid tax in the previous profit year.
For example, if someone with a 31 March balance date overestimated the loss they will make in the 2020-21 tax year and therefore has additional tax payable in the 2019-20 income year, IRD interest will apply from 28 August 2019, the date of their first instalment for the 2019-20 income year.
As of 8 May 2020, IRD charges interest of seven percent.
Moreover, the COVID-19 relief relating to remission of IRD interest is not available to taxpayers who use the temporary tax loss carry-back scheme.
How Tax Management NZ can help
If it turns out you have additional tax to pay in the 2018-19 or 2019-20 income year due to overstating your loss during the 2019-20 or 2020-21 income year, then help is available.
As an IRD-approved tax pooling provider, Tax Management NZ (TMNZ) can mitigate your exposure to the interest incurred on this tax.
That’s because we can apply backdated tax paid to IRD on the date it was originally due against your liability.
You make a payment directly to TMNZ comprising the core tax amount plus our interest. We then arrange a transfer of the tax you require from our IRD account to your IRD account.
The interest you pay TMNZ is significantly cheaper than what IRD charges for underpaid tax.
Once IRD processes this transaction, it will treat it as if you paid on time.
This clears any IRD interest and late payment penalties showing on your account.
Legislative deadlines do apply.
If you have any questions about tax pooling, please feel free to contact us. We’re here to help.
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.
Anti-money laundering requirements and tax pooling
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.
How filing late and losing EOT impacts provisional tax payments
Losing extension of time (EOT) due to filing income tax returns late means someone can only use 105 percent of the previous year's residual income tax (RIT) when calculating their provisional tax payments.
That's because if a taxpayer fails to provide their returns(s) on time, IRD's system defaults to using the date by which they were legally due to file the return for that year – not the date on which they furnished the return.
Only if someone files their return(s) within the required timeframe will the actual date of filing be used.
This is important to remember, particularly when using TMNZ’s Tax Calculator.
An overview of IRD's system and TMNZ's Tax Calculator
When a taxpayer files their return for the most recently completed year, IRD’s system uses the lesser of standard uplift or a third of their RIT to determine the provisional tax instalment amounts due and payable for that year.
As per s120KBB (3B) Tax Administration Act 1994, the standard uplift instalment can either be the lesser of the 105 percent or 110 percent calculation. You can read more about that here.
TMNZ’s calculator follows the same logic as IRD's system.
To determine the instalment amounts due and payable, it requires a taxpayer's RIT and filing date information for the past three years:
- The current tax year or most recently completed tax year (e.g. 2020).
- The tax year prior to that (e.g. 2019).
- The tax year two years prior to that (e.g. 2018).
Whereas IRD has access to this information, we unfortunately don't. That's why we ask users to enter these details themselves.
If someone was late in providing a return and lost their EOT in any of the years before the current or recently completed tax year, then it’s crucial they know the correct filing date to use, otherwise the calculator will spit out incorrect instalment amounts.
After all, garbage in, garbage out.
Example
A taxpayer with a 31 March balance date decided to use TMNZ’s Tax Calculator to work out the provisional tax payable for the 2019 tax year. They did not pay any income tax for that year and wanted to purchase it from TMNZ to reduce their interest cost and eliminate late payment penalties.
RIT and filing date information for the past three years
| Tax Year | RIT | EOT | Legal date by which they must file their return | Date they file their return | Return status |
| 2017 | $6000 | Yes | 31 March 2018 | 1 May 2018 | Late |
| 2018 | $10,000 | No | 7 July 2018 | 16 January 2019 | Late |
| 2019 | $25,000 | No | 7 July 2019 | 30 June 2019 | On time |
As you can see, the taxpayer has lost their EOT for the 2018 tax year due to filing their 2017 return late. Their 2018 return was also late, so they don’t have EOT for their 2019 tax year either. However, the taxpayer did file the latter year’s return on time.
This means when using TMNZ’s Tax Calculator they must enter into the ‘date of filing’ field the respective legal dates by which they were required to furnish the returns for the 2017 and 2018 tax years.
For the 2017 tax year, this will be 31 March 2018 as their EOT was still applicable. For the 2018 tax year, this will be the non-EOT deadline of 7 July 2018.
Legislation states anyone who has an early balance date (i.e. the period between 1 October and 31 March) must file their return by 7 July if they do not have EOT. Those without EOT who have a late balance date (i.e. the period between 1 April and 30 September) must file their return on the seventh day of the fourth month after their year-end.
As the 2019 tax return was provided within the mandatory timeframe, the taxpayer can use the actual date on which they submitted that year’s return to IRD.
Recap: How things should look in TMNZ’s Tax Calculator
| Tax year | RIT | Date of filing |
| 2017 | $6000 | 31 March 2018 |
| 2018 | $10,000 | 7 July 2018 |
| 2019 | $25,000 | 30 June 2019 |
How this impacts provisional tax instalments
In this situation, the 2019 provisional tax instalments will be based on the standard uplift amount as this is lower than a third of the RIT for that year.
However, ALL uplift payments will be based on 105 percent of the 2018 RIT.
That’s because the taxpayer lost EOT for the 2018 tax year and, therefore, was supposed to have filed their return for that year on 7 July 2018 – before the date of their first provisional tax instalment for the 2019 tax year (this being 28 August 2018).
As such, they cannot base any payments off 110 percent of their 2017 RIT.
Therefore, the 2019 instalment amounts due and payable as per IRD's system – and what TMNZ's Tax Calculator will tell them to purchase – at each date are as follows:
- 28 August 2018: $3500
- 15 January 2019: $3500
- 7 May 2019: $3500
TMNZ's calculator will also show the taxpayer needs to purchase at their terminal tax date the final balance of $14,500 to settle the 2019 RIT, as their RIT is less than $60,000.
Please note the terminal tax date will have been 7 February 2020 due to them losing their EOT. They would have had 75 days from this date to purchase from TMNZ the 2019 income tax they require.
Don't forget the flow-on effect
It is also important to remember that because there was a requirement to file the 2019 return by 7 July 2019, the taxpayer can only use the 105 percent uplift calculation for their 2020 provisional tax payments.
Again, this is due to the filing date for the 2019 return being before the first instalment date for the 2020 year.
So, using the RIT information above, the standard uplift payments for the 2020 tax year will have been:
- 28 August 2019: $8750
- 15 January 2020: $8750
- 7 May 2020: $8750
For those using the standard uplift method, the 105 percent calculation will continue to be the only option for them to determine provisional tax payments until the taxpayer re-applies for their EOT.
Legislative references
You can find the legislation pertaining to filing dates of tax returns and EOT in s37 and s38 Tax Administration Act 1994.
Please feel free to contact us if you have any questions.
Tax loss carry-back scheme: Important considerations
Standard imputation (ICA), ownership continuity and grouping rules still apply under the new tax loss carry-back scheme, while anyone who overestimates their loss will face IRD interest (UOMI) from the date of their first provisional tax instalment for the previous year.
Moreover, company profits already paid out via shareholder-employee salaries or dividends are unable to be reversed to take advantage of the scheme.
A basic overview of the scheme
Under the temporary scheme, taxpayers who expect to make a loss in either the 2020 or 2021 tax year will be able to estimate that loss and use all (or a portion of it) to offset any profit made in the previous year.
This allows those who need cash urgently to receive a refund of any income tax paid in the previous year.
It applies to companies, trusts, and individuals (other than those deriving only PAYE income) and those that operate through partnerships and look-through companies.
The legislative reference is sIZ8 Income Tax Act 2007.
Here are some of the things you need to consider before electing to use the scheme.
The ICA rules
Be mindful that standard ICA rules apply as part of the tax loss carry-back.
That means in order to obtain a refund of income tax, a taxpayer must have an ICA credit balance at the end of the most recently ended tax year (i.e. 31 March 2020) that is at least equal to the refund amount.
Alternatively, they can complete an interim ICA return up to the date of their refund request.
Provisional tax deposits held in a tax pooling account that are refunded under the loss carry-back scheme will be subject to the imputation debit rules that normally apply for pooling.
Given the potential exposure to imputation penalty tax of 10 percent and UOMI, the timing of tax pooling refunds due to a loss being carried back should be considered on an ongoing basis to mitigate this risk.
The results can be catastrophic if they’re not.
We strongly encourage you to contact us before you refund any balances from the pool.
Ownership continuity and grouping rules
The ownership continuity requirements that relate to the loss carry-forward provision, and the normal grouping rules, also apply under the tax loss carry-back scheme.
This means a company must have maintained at least 49 percent common ownership throughout the loss year and preceding profit year.
For entities part of a group, the group must have retained 66 percent common ownership throughout the loss year and the preceding year.
That said, there are provisions in the tax loss carry-back legislation that deal with part years in the ownership continuity period.
IRD has examples of this in its commentary for the COVID-19 Response (Taxation and Other Regulatory Urgent Measures) Bill.
Time bar rule
IRD can reassess both the loss year and the preceding profit year at the same time – even if the preceding profit year is time barred.
That is something to keep in mind.
Situations where the scheme cannot be used
A taxpayer must have taxable income in the previous year.
Given that, a company that has already paid out its profit via shareholder-employee salaries will not have any taxable income to which they can apply future losses they wish to carry back.
This is also the case if the taxpayer has already distributed its profits as a dividend or made a subvention payment.
Therefore, they cannot use the scheme.
Taxpayers who have ringfenced rental losses will not be able to carry back losses either.
It's the same with multi-rate PIEs. This is because they have a cash-out for losses that provides immediate tax relief in this situation.
Situations where it will offer limited benefit
A taxpayer can only carry back losses one year (e.g. from the 2021 tax year to the 2020 tax year).
As such, there will be situations where the scheme will only free up a small refund of income tax.
Example one
| Tax year | Taxable income |
| 2019 | Massive profit |
| 2020 | Modest profit |
| 2021 | Huge loss forecast |
Someone can only carry back the huge forecast loss for 2021 to the extent of the taxable income in 2020. As you can see, this is considerably lower in comparison to the 2019 tax year.
This will result in a very small refund of tax under the scheme.
Example two
| Tax year | Taxable income |
| 2019 | Massive profit |
| 2020 | Small loss |
| 2021 | Huge loss forecast |
Someone can only carry back the small loss from 2020 to the 2019 year. The huge forecast loss from 2021 cannot be utilised as part of the scheme.
Once again, this will result in a small refund of tax.
Here’s another thing to remember.
If the taxpayer is part of a wholly owned group of companies, the loss amount they can carry back is limited to the amount that cannot be offset against the profits within that group during the loss year. In other words, the loss must be used within the group first during the loss year.
UOMI ramifications
A taxpayer can re-estimate provisional tax in the previous year as many times as they like under the scheme. They can keep doing so up until the date they file their return for the loss year (or the date by which they must legally file this return if this is earlier).
However, re-estimating provisional tax means the UOMI rules in s120KB Tax Administration Act 1994 will apply.
That means if someone overestimates their tax loss carry-back for the loss year – resulting in tax to be paid later due to receiving a larger refund to which they were entitled – they will be liable to pay UOMI from the date of their first provisional tax instalment in the preceding profit year.
Interest will be charged on the difference between the income tax they owe for the profit year and the income tax they paid in that year.
The income tax they owe for the profit year is based on the original taxable income for that year, minus the actual loss from the loss year. The tax they paid in the profit year is based on the original taxable income for that year, minus the total loss year refund they initially received due to overestimating their loss.
The amount on which UOMI is charged will be split evenly across the number of provisional tax instalments payable for the profit year.
Section 183ABAB of the Act – which gives IRD the power to remit UOMI for taxpayers who cannot make tax payments after 14 February 2020 due to COVID-19 – will not be able to assist.
TMNZ can help reduce UOMI
However, someone who is incurring UOMI due to overestimating their tax loss carry-back can use TMNZ to significantly reduce the interest cost on the additional tax payable if they are within 75 days of their terminal tax date for the profit year (or 60 days from the date IRD issues a notice of reassessment if the profit year is a closed income year).
Flexitax® allows them to apply backdated tax paid to IRD on the date it was originally due against their liability.
As such, IRD will treat the taxpayer as having paid on time once it processes this transaction, remitting any UOMI and late payment penalties incurred.
It’s a safety net for someone who has a ‘mare forecasting their loss.
It may pay to wait and see
For many taxpayers, the most recent tax year would have ended on 31 March 2020.
Up until the start of that month, when the impacts of COVID-19 really hit, everything was running smoothly. It’s quite likely their profitability was not significantly impacted.
But there’s a strong likelihood it will be during their 2021 tax year.
However, as it’s still early days in that year, having to estimate a loss to carry back to 2020 this far out is quite difficult.
Honestly, who really knows what the landscape will look like next month – let alone by 31 March 2021 – given the clouds of uncertainty lingering above the domestic and global economies in the wake of COVID-19?
The risk of incurring UOMI if they get it wrong means they may wish to err on the side of caution with their loss estimate and then re-estimate as the year progresses once the picture becomes clearer.
The other option is to hold off until later. That's what many appear to be doing at this stage given the low uptake.
Yet a downside of playing it safe or waiting a little longer is the taxpayer may not receive the full cashflow injection they are seeking right now.
Does their desperate need for immediate funds outweigh the potential UOMI consequences down the track, or can they afford to wait?
That’s something a taxpayer is going to need to weigh up before opting in.
Don't forget tax pool deposits
For those holding provisional tax deposits in TMNZ’s tax pool who want access to their payments now – but don’t yet have the confidence to file a loss carry-back – there is another option.
They can take a line of credit against their deposits, for interest rates below three percent. They also have the option of restoring those deposits at their original deposit dates once their cashflow situation improves.
However, there are a couple of things to note.
For starters, the ICA position needs to considered first as the debit rules for pooling apply in this situation as well since the transaction is treated as a sale of tax.
The tax must also be paid back and transferred to IRD within 75 days after the terminal tax date for that tax period.
Nonetheless, it's something else to think about if a taxpayer requires cash in the wake of COVID-19.
Summary
The above are some things of which to be aware when it comes to the tax loss carry-back scheme.
For business owners, this IS NOT tax advice. We recommend you speak with a tax specialist in the first instance about your particular situation. The legislation is quite complex.
You can find one of our premium accounting partners here.
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.
TMNZ virtual roadshow: Tony Alexander talks post-COVID-19 economic recovery
The increase in New Zealand’s net debt to GDP ratio over the next four years is not the bogeyman some are making it out to be, nor will the Government necessarily have to increase taxes to pay off what they are borrowing.
That’s according to one of New Zealand’s leading and respected economists, Tony Alexander, who last week discussed a range of topics relating to the current and post-COVID-19 economic landscape as part of TMNZ’s first virtual roadshow for the year.
The net debt to GDP ratio increase
The Budget shows New Zealand’s net debt to GDP ratio is forecast rise to 30.2 percent this year and peak at 53.6 percent in 2023.
This is up from 19 percent last year.
Unsurprisingly, this has led to concern in some quarters.
However, Alexander (pictured left) says it’s important to remember there is no permanent increase in the size of the Government’s spending as a proportion of the New Zealand economy.
“Some people may be looking at this as the Government spending a lot more. Yes, in the short term they are, but in about five years’ time the ratio of the Government’s spending to the size of our economy will pretty much be back to where it was [during the] last fiscal year.
“That gives me assurance that Grant Robertson does want to continue along the lines of finance ministers in New Zealand since the early 1990s of trying his best as possible to get good control over the quantity, and hopefully quality, of Government spending going forward.”
Alexander says that credit rating agency Standard & Poor’s believes New Zealand’s economic outlook is better than The Treasury is forecasting.
They are showing no signs of issuing a potential downgrade in the wake of the Budget, he says.
A peak net debt to GDP ratio of 53.6 percent is still lower than where other economies are at currently. Some are sitting as high as 110 percent.
“Even after all this, we’re still going to be in a very good position,” says Alexander.
Tax hikes not the only way to pay down debt
In terms of how the Government will go about reducing its level of debt, there is talk they may have to introduce new or increase existing taxes.
That's because its tax revenue is forecast to drop.
The Treasury expects tax revenues to fall from $86.5 billion for the year to June 2019 to $80.1 billion dollars for the year to June 2021. Over the period to June 2024, it expects tax revenue to be more than $15 billion lower net of the effect of the reduced GDP over the period.
However, Alexander believes it is possible for the Government to reduce its debt without tinkering with the tax system.
He bases this claim on past experiences.
For instance, Alexander cites successive National- and Labour-led administrations managing to decrease New Zealand’s net debt to GDP ratio from 55 percent in 1992 to just six percent in 2008 through controlled, responsible spending.
“New Zealand has an established record of good fiscal control under both Labour and National governments,” he says.
“My expectation is we will see the net debt to GDP ratio in New Zealand decreasing over an extended period, that it’ll be a gradual process and it will be able to be achieved with spending restraint, rather than whacking GST up to 20 percent or introducing a new 46 percent top marginal tax rate or that sort of thing.”
Increasing taxes in the future would also be counter-intuitive to the Government’s goal of trying to get people to spend money now, when confidence is low.
“If they did [raise tax], we would spend less in anticipation of higher taxes down the track.”
Hear more from Tony Alexander
The affable Alexander spoke at length about several different topics during his informative, wide-ranging session with TMNZ.
These include:
- His thoughts on the Government’s Budget and The Treasury’s economic forecast.
- How the New Zealand dollar will fare in the next 12 to 18 months.
- Why the party is over for tourism and what the collapse of that industry might mean for regional New Zealand.
- When he feels banks will resume lending again.
- Why quantitative easing does not cause hyperinflation, but may push up asset market prices.
- The chances of the Reserve Bank of New Zealand resorting to a negative official cash rate.
- The outlook for the property market.
Trust us, this is one hour worth your time.
You can watch Alexander’s full webcast here.
Next virtual roadshow – register now
Richard Owen from IRD will be joining us as part of our next TMNZ virtual roadshow on Wednesday 17 June.
Owen is the small and medium enterprises customer segment lead at the department. He will cover tax policy on COVID-19 and the impact for IRD, tax agents and taxpayers.
If you have questions about the remission of UOMI, the carrying back of tax losses or the Small Business Cashflow Loan Scheme, then you won't want to miss this.
You can register here. Get in quick because spaces are going fast.
IRD system issues affecting tax pooling
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.
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 Tsarina at Shore Accounting Solutions
Tax pooling is part of the strategy Shore Accounting Solutions employs to assist businesses with managing cashflow and provisional tax payments.
Tsarina Dellow (pictured above) is a chartered accountant at the two-person firm in Amberley, 45 minutes north of Christchurch.
She says paying provisional tax on dates IRD prescribes can be hard on small- and medium-sized businesses’ cashflow. That’s particularly the case during the January to May period, when the department awaits payment of two provisional tax instalments (not to mention GST).
Xero’s Small Business Insights reveal January and May are two of the most difficult months in terms of cashflow. August is another. (See a pattern here?)
Tsarina says business owners can come unstuck in this period – particularly if they’re guilty of not squirreling cash away throughout the year.
“Kiwis are often quite bad at saving. They’re not very good at putting money away in the good times, so when they have a bit of a bump – maybe a customer pays late or a supplier puts their costs up – they don’t often have that buffer there. When you don’t have that buffer, things start to go downhill and it gets really stressful for people really, really fast.”
Enter Tax Management NZ
As an IRD-approved tax pooling provider, Tax Management NZ (TMNZ) allows businesses to make their provisional tax payments when it suits them.
There is no need to worry about late payment penalties. And the interest it charges is fairer than the 8.35 percent IRD slaps someone with when they miss a payment.
Tsarina mentions this service to clients when discussing tax planning and cashflow management if she notices they’re going to encounter any difficulty at certain times of the year.
“If [TMNZ] can help them out with that, we can set a programme in place to even things out during the year,” she says.
“It delivers excellent benefits for people’s cashflow. They’re able to pay their tax as and when it suits them and their business – and they don’t have to worry about the IRD always chasing them up. If they can’t meet a provisional tax payment, they can hand it over to TMNZ and pay it when they can.”
About Shore Accounting Solutions
Tsarina has been working at Shore Accounting Solutions for four years. Her colleague Ben Shore founded the firm in 2012.
The duo is big on providing great, technical tax advice and helping North Canterbury businesses and the community grow.
You can watch our full interview with Tsarina below.