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Tips to ease your tax payment pain

Pointers from accounting firm BDO on tax pooling and other smart ways to avoid getting stung for overpaying or underpaying provisional tax.

By Iain Craig, BDO New Zealand's Head of Tax

Not making provisional tax payments on time or underpaying provisional tax can expose you to use of money interest and late payment penalties. Iain Craig from accounting firm BDO looks at the options small businesses have to best manage their tax payments.

When it comes to paying income tax, any over or underpayment will attract interest, known as the use of money interest (UOMI) rate.

UOMI is aimed at encouraging people to pay the right amount of tax at the right time while also providing compensation to you if you pay too much tax, and to the Government if you pay too little.

It’s periodically adjusted to reflect changing economic conditions and movements in underlying bank interest rates. At present it’s 9.21% on underpayments of tax, and 2.63% per annum on overpayments.

The interest rate spread is not dissimilar to the different rates paid on bank deposits and charged on loans. However the spread is wider to discourage taxpayers from using Inland Revenue as a bank.

It’s important to proactively manage your provisional tax payments to mitigate your exposure to UOMI and late payment penalties.

It’s important to proactively manage your provisional tax payments to mitigate your exposure to UOMI and late payment penalties.

This means not just trying to calculate the correct amount of provisional tax to pay at each instalment, but also exploring all your options for funding provisional tax payments through the use of tax pooling.

This allows approved tax intermediaries to match due tax refunds with taxpayers who have tax to pay. The tax intermediaries offer this service at better interest rates than the Government’s UOMI rates, offering significant savings.  

Tax pooling also saves taxpayers who have underpaid from late payment penalties as the transfer to their Inland Revenue account is at the original date of payment by the transferor.

Approved tax intermediaries offer a range of products and finance options to help you manage your provisional tax compliance, such as:

  • Paying your provisional tax into a tax pool to get a higher interest rate in the event of being due a tax refund; and greater flexibility over ease of refunds and managing your provisional tax compliance at each instalment date.

  • Purchasing a tax credit from the tax pool where you had a higher liability to pay provisional tax than you were able to meet at the instalment date usually resulting in a reduced rate of UOMI and elimination of any late payment penalties.

  • A finance option where you can finance a tax credit at a certain date with the provisional tax being paid at a later time. This guarantees the credit being transferred into the Inland Revenue account at the earlier instalment date when the finance option is closed out by settling the principal amount at the end of the finance period.

The process requires no financial information, no complicated application forms and no personal guarantees or security and approval is in most cases immediate. All funds in the tax pool are held by independent trustees, such as the Public Trust or Guardian Trust, until transferred to Inland Revenue.

Tax pooling offers an important alternative source of funding for your business to help you manage your tax obligations according to your situation.

Tax pooling offers an important alternative source of funding for your business to help you manage your tax obligations according to your situation.

Evaluating your options

There are a myriad of reasons why you may incur UOMI and late payment penalties inadvertently. So it’s important to evaluate the options carefully to determine which suits you best.

Where your cash flow cycle doesn’t match the provisional tax instalment dates, for example, you might consider tax finance where you have reasonable certainty of funds being available at the end of the finance period.

If you have surplus cash early in the year, you may consider paying the first instalment into a tax pool and then reevaluate your needs at the second and third instalments as necessary.

Contact your tax advisers to discuss the options available to you and to put an appropriate plan of action in place.

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