Chief executive of Tax Management NZ
Not one income tax payment — but potentially two. That is a situation which lies in wait for many business owners across New Zealand in April and May.
Allow me to elaborate. On April 7, Inland Revenue (IRD) expects terminal tax for the 2017 income year to be paid.
Simply put, this means (for whatever reason) you did not pay enough provisional tax for the previous year and need to square things up. To make matters worse, there may also be interest already applied to this underpayment.
A month later, IRD will come calling again, this time for your final instalment of provisional tax for the 2018 income year.
Hardly an ideal situation, is it? The cashflow challenges presented by this tax double-whammy can be very real.
Don’t worry. There are things you can do to ensure you are able to navigate your way smoothly through the taxing (forgive the pun) April and May months.
The terminal tax must be dealt with immediately. If this is not addressed by April 7, late payment penalties will kick in, and you will have IRD’s debt collection team breathing down your neck.
If you find interest is being charged on the tax owed, this can be reduced by up to 30 percent through using an IRD-approved tax pooling intermediary.
An intermediary applies surplus tax paid to IRD, on the date it was originally due, against your liability, when you pay what you owe through it. IRD treats this as if your provisional tax was paid when it was originally due, eliminating any interest and late payment penalties incurred.
They also provide you an additional 75 days, past your terminal tax date, to pay your 2017 income tax liability.
In terms of the May 7 provisional tax, the first thing to do is review your financial year.
As your year ended on March 31, you will have a rough gauge on how things have played out. Either increase the payment or lower it depending on the amount of provisional tax you have paid.
If paying provisional tax so soon after terminal tax is likely to trigger a cashflow squeeze, tax pooling can offer some payment flexibility, at a reduced interest cost and without incurring late payment penalties.
Through an intermediary, provisional tax can be deferred to a time in the future (up to 12 months). For an upfront fee, the intermediary pays tax on your behalf to IRD on May 7 and you repay the intermediary at the agreed upon date. Approval is guaranteed, and no security is required.
An intermediary also allows for provisional tax to be paid in instalments.