Question: What is the amount on which IRD will remit interest (UOMI) at the date of the final provisional tax instalment if someone outside of safe harbour is unable to pay on time due to COVID-19?
The answer: We cannot say for certain as this is a scenario IRD has yet to address in its guidance (as of today’s date).
A taxpayer expecting their RIT for the year to be $60,000 or more must pay the remaining balance to settle their liability at the date of their final provisional tax instalment to avoid incurring UOMI.
For those with a 31 March balance date, 7 May 2020 is the final instalment for the 2020 tax year.
A problem that arises is someone might not know the actual RIT for the year by this date. In fact, it might be several months after the year-end before they determine this figure.
As paying the remaining balance on 7 May 2020 will therefore require some guesswork, there is a chance they could miscalculate and end up underpaying.
Example
A taxpayer expects to have RIT of $80,000 in the 2020 tax year and must pay the final balance on 7 May 2020 to avoid UOMI.
They believe the final balance to settle the RIT for the year will be $40,000.
However, because of COVID-19, they are unable to pay on 7 May 2020 and decide to seek assistance from IRD.
The department agrees to grant a remission of UOMI on the $40,000 for eight months under s183ABAB Tax Administration Act 1994.
However, when the taxpayer finalises their return eight months later, it turns out their 2020 RIT is $85,000.
This means they should have paid $45,000 on 7 May 2020 to settle the liability for this year.
All of which begs the question: How will the remission of UOMI work in this instance?
Below we look at three possible approaches IRD may take.
Option one
IRD might only agree to remit UOMI on the $40,000 because:
- This is what the taxpayer determined what was due and payable on 7 May 2020 under sRC10 (5) and (6) Income Tax Act 2007; and
- The taxpayer should have had a reasonable expectation of their final liability for the 2020 year given the 7 May 2020 instalment is due after their year-end.
Option two
IRD may take an approach where its UOMI remission at the date of the final instalment applies to the lesser of:
- The amount calculated by the taxpayer to the settle the liability ($40,000); or
- The amount that is required to settle the liability ($45,000).
In both options one and two, the taxpayer will liable for UOMI on the $5000 shortfall from 8 May 2020 until this is paid.
Option three
IRD might be generous and agree to remit UOMI on the final balance of $45,000.
If that’s the case, a taxpayer unable to pay on time due COVID-19 receives a major concession for their miscalculation.
Flexitax® is your safeguard
However, this is merely speculation at this stage.
Until IRD clarifies its position, a taxpayer may wish to consider entering a Flexitax® arrangement as a safeguard.
If the department agrees to a full UOMI remission, cool bananas. There’s no requirement to follow through with the arrangement.
If IRD only agrees to waive UOMI on the amount calculated by the taxpayer, then Flexitax® lets them significantly reduce the interest cost they face on any additional tax payable.
As always, we look forward to the department’s clarification.
Over to you, IRD.