Are you a provisional tax payer? The things you need to know!
The Inland Revenue has been progressing with their “simplifying business tax processes” strategy for some time now, with “mixed” results in some areas. One of these important changes affects provisional taxpayers and how “use of money interest” rules are applied.
Under the old rules, most provisional taxpayers had to pay their tax liability in three instalments and interest was charged or credited for under or over payments. The old rules also meant that many taxpayers had to start estimating their year-end tax liability very early in the financial year before they had any idea of how their business profitability was tracking. They also assumed a “straight-line” earning of income throughout the year and for taxpayers where income varies through volatility or seasonality. This was unfair and could expose them to an interest charge.
Where individuals had less than $50,000 tax liability and non-individuals less than $2,500 there was a ‘safe harbour’ rule. This meant that interest was not usually charged, provided the standard calculation method (i.e.: paying provisional tax based on a previous year, plus an uplift of 5% or 10%) was used. However, if provisional tax was estimated, this automatically cancelled the ‘safe harbour’ status. Estimations were typically used when a taxpayer anticipated a reduction in next year’s income and hence wanted to pay less provisional tax than the standard method calculated.
The new rules extend the tax liability threshold to $60,000 for ‘safe harbour’, for both individuals and non-individuals (Trusts and Companies). In other words, if your Residual Income Tax is less than $60,000, then you are not subject to Use of Money Interest, which is a big concession, however what is not so transparent is how you can very easily breach your ‘safe harbour’ status.
Paying any provisional tax instalment late or paying less than the Inland Revenue calculated amount will cancel the ‘safe harbour’ status, incurring interest and penalties. Also, filing an estimate will automatically cancel the ‘safe harbour’ status (which is no different to how the old rules used to operate). The interest calculation period has also changed which potentially increases your interest bill especially if your income has increased. We have seen examples of clients paying their provisional tax one day late and triggering large interest and penalty bills from the Inland Revenue, especially where their income levels have risen compared to the previous year. If you are in this situation, then we will be looking at using a tax intermediary such as Tax Management NZ to buy the correct amount of tax back on the due date. This will necessitate you paying the tax again and then potentially waiting until some time later to get the overpayment of tax back again. Due to the varying situations possible, we will need to look at this on a case by case basis to ensure the remedy is economic.
In summary, in order to avoid an unexpected interest and penalty bill from the Inland Revenue;
- the method of calculating your provisional tax is very important
- you will need to pay on or before the due date
- paying the correct amount will be essential
If you are concerned, for any reason or believe that you may have a problem, with your provisional tax, please get in touch with us.
