Tax Finance: An alternative funding source
Growing a business is hard yakka. More specifically, it costs money.
And therein lies a problem for many small business owners: Cashflow. In fact, it’s not a problem. It’s a major problem. According to Xero’s Small Business Insights, New Zealand business sales fell by over 8% for the year ending June 2024.
Now granted, there are several choices available when it comes to accessing funds you need to. A bank loan, overdraft, credit card and an unsecured loan are just some.
But again, it’s not that simple. There can be a few hoops to jump through as part of the approval process and you will likely have to use assets as collateral, often using your personal house (or the house of a shareholder, for example) as security to get a lower cost of funds. If there is no approval or credit review process, then chances are you will be up for double-digit interest rates. Ouch.
However, there is another option. It’s one you probably have not heard about either.
The other option – Tax Finance
Did you know that your provisional tax payments are also a source of finance? Yes, that’s right – provisional tax. That thing many small business owners loathe paying. That thing that places undue pressure on, you guessed it, cashflow.
Allow us to explain.
An IR-approved tax pooling provider such as TMNZ offers a payment option known as Tax Finance. It lets you free up working capital by deferring a provisional tax payment to a later date, without incurring Inland Revenue (IR) interest of 10.91% (as at 7 August 2024) and late payment penalties.
For an upfront finance fee, you can choose a time in the future you wish to pay what you owe. Essentially, this allows you to use the money you have set aside for income tax more productively.
The finance fee or interest you pay to TMNZ is:
- similar to the interest rate charged by a bank for a residential mortgage; and
- tax-deductible.
So, you could also use the money set aside to repay your mortgage earlier, thereby reducing non-deductible interest costs charged by the banks on your personal house. The cost of Tax Finance is cheaper than using your business overdraft or an unsecured loan. Approval is guaranteed. Moreover, you do not have to provide any security.
Even better, if you already have paid tax deposits into the TMNZ tax pool, you can finance them back out while keeping the original tax date. We call this Tax Drawdown.
Altogether, this effectively treats your tax payments with the TMNZ tax pool as a revolving credit facility.
Who might Tax Finance suit?
Tax Finance will suit those who:
- are looking for funding that does not affect other lines of credit or their General Security Agreement with their bank
- want to keep headroom in their existing lending facilities
- do not wish to go through the rigmarole of the normal lending process
- want a fixed interest cost
- feel there is more to gain financially from being able to keep money in their business instead of paying income tax.
How much does Tax Finance cost?
It depends. The finance fee is based on the amount of tax due and the future date you wish to pay.
As mentioned above, the TMNZ finance fees are similar to the home loan mortgage interest rates charged by banks.
For instance, at current rates¹ it only costs $335 to defer a $10,000 provisional tax payment for six months. That works out to be approximately 6.70%pa².
How does Tax Finance work?
Here's how Tax Finance works in a nutshell:
- Ahead of your provisional tax payment date, you tell TMNZ the amount of tax you want to finance, the future date you want to finance that to (e.g., the date you think you may be able to pay the tax amount) and pay the finance fee based on the quote TMNZ provides. TMNZ arranges for a bank to make a payment for you in its tax pool account at IR on the provisional tax date. This payment is date-stamped.
- At the agreed upon future date (known as the maturity date), you have a few options:
- settle the full tax amount by paying TMNZ; or
- roll over the financed amount for another period of time – in this case you can get a quote for a further finance fee to pay based on how long you want to finance for;
- settle part of the financed tax and roll over the remaining part;
- settle only the amount you need (if your actual tax liability has reduced).
- Upon settlement of the financed tax, ownership of the tax deposit made by the bank changes to become owned by you and sits in your tax pooling account with TMNZ. You can then request TMNZ to transfer the tax payment it is holding on your behalf to your IR account to clear your tax liability. Once they’ve processed the transfer, IR treats this tax amount as if the tax was paid on your original provisional tax date. It will also reverse any interest and late payment penalties showing on your account.
In the event you choose the fourth bullet in step 2 above, there is no obligation on you for the remaining financed tax (even if you decide to not settle any of the financed tax). You can simply walk away, no questions asked. Or you can ask us to try and sell the residual unused financed amount for you and earn you some interest return, effectively getting some of your finance fee back.
TMNZ offers a competitive rate for Tax Finance. For more information, get in touch.
¹ At at August 2024
² The published ANZ 6 month residential mortgage rate as at 7 August 2024 is 6.99%pa if you have at least 80% LVR.
