Tax pooling is an IRD-approved service that alleviates some of the provisional tax system’s challenges. It does this by offering another way for taxpayers to pay their income tax.
One of the big problems with provisional tax is that the IRD expects payments to be made on dates it sets – no matter when a business earns their income or the state of their cashflow. They will charge late payment penalties for failure to do so.
The other bugbear is the large differential between the interest IRD charges when a tax payment is missed or underpaid (currently 8.35 percent) and what it pays (currently 0.81 percent) when a taxpayer pays too much tax for the year.
Tax pooling remedies these issues.
It offers taxpayers more payment flexibility, without having to worry about incurring late payment penalties.
It also closes the taxman’s wide interest differential by allowing a taxpayer to earn a greater return if they overpay tax for the year and reduces a taxpayer’s interest cost thereby eliminating late payment penalties if they underpay, miss a payment or are reassessed by IRD.
There are two aspects to tax pooling: Paying through the pool and depositing into the pool. Each works slightly differently and will suit different taxpayers.
PAYING THROUGH TAX POOLING
A commercial tax pooling provider such as Tax Management NZ makes payments into its account at the IRD on every provisional tax date on behalf of taxpayers wanting the option to pay an upcoming payment in instalments or at a time that suits them.
Taxpayers entering an arrangement with a tax pooling provider then make their provisional tax payments at the agreed upon date in the future (or as and when it suits their cashflow if paying in instalments). When the tax pooling provider receives these payments, it allocates the tax the taxpayers need to their required provisional tax date(s).
As the tax the tax pooling provider is transferring to a taxpayer’s IRD account has been paid and date stamped as at the original due date, IRD treats it as if the taxpayer has paid their provisional tax on time when it processes this transfer. This, therefore, eliminates late payment penalties.
The taxpayer has some interest to pay the tax pooling provider, but this is lower than what IRD charges when tax is not paid.
Who might Tax Pooling Suit?
Taxpayers wishing to manage their cashflow or free up working capital so they can grow their business.
DEPOSITING INTO THE POOL
Rather than paying the IRD directly on their provisional tax dates, taxpayers can choose to deposit their payments during the year into a tax pooling provider’s account at IRD.
These payments, which are date stamped as at the date of deposit, are held in this account and the tax pooling provider makes a note in its registry as to which taxpayer they belong to.
Once the taxpayers finalise their income tax return for the year, they ask the tax pooling provider to transfer the amount of tax they require at each date to their own IRD accounts. As these deposits were date stamped as at the original date their provisional tax payments were due, IRD treats it as if they paid their obligations for the year on time.
In the event these taxpayers have surplus tax after transferring what they need from the tax pooling provider’s account, they have the potential to earn additional interest by selling this tax to a taxpayer who has underpaid their provisional tax for the year.
A taxpayer – regardless of whether they deposit their own provisional tax payments with a tax pooling provider – can purchase this tax if they have underpaid for the year and apply this against their own liability to reduce their IRD interest cost and eliminate late payment penalties.
Who Might Depositing Into the Pool Suit?
Taxpayers whose income is highly volatile or significantly fluctuates from year to year.
WHAT TAX TYPES CAN TAX POOLING BE USED?
Tax pooling can be used for upcoming, missed or underpaid provisional and terminal tax payments for the current tax year or one just completed.
In situations where IRD issues a notice of reassessment, tax pooling can be used to reduce the interest cost and eliminate late payment penalties on historic income tax as well as other tax types such as GST, PAYE, RWT, NRWT and FBT.
Please contact us if you would like to know more about tax pooling or have any questions. We’re here to help.