Underpaid income tax?
Underpaid provisional tax can cause a few headaches.
Maybe you did not keep up with your provisional tax payments throughout the year? Perhaps you did not end up paying enough because you had a better-than-expected financial year. It could be that seasonality or volatility make it difficult to forecast your provisional tax payments.
Whatever the case, owing the taxman additional income tax can put pressure on your business' cashflow. With Inland Revenue's interest clock continuously ticking at 8.27% (9.21% for tax debt incurred up to 8 May 2016) the cost can quickly add up.
An option we have discussed before is tax pooling. It is a service designed to reduce interest costs and provide payment options for provisional taxpayers.
How does it work?
For underpaid income tax, you can settle what you owe IRD by paying through a tax pooling intermediary such as Tax Traders Ltd at an interest cost lower than the interest IRD charges on underpaid tax.
The payment you make is essentially a purchase of tax that Tax Traders Ltd paid to IRD on the original date the provisional tax was due.
As this payment is date-stamped, IRD treats the tax as paid on time once it has processed the transfer from the tax pool to your IRD account. Any late payment penalties and interest showing on your account will be reversed once this happens.
Is tax pooling secure?
Tax pooling intermediaries are registered with IRD and operate under legislation set out in Income Tax Act 2007 and Tax Administration Act 1994.
The tax pool accounts operated by tax pooling intermediaries are held at IRD and managed by Public Trust.
What to do next
Contact us if you would like to discuss tax pooling as an option to clear up your underpaid provisional tax debt.
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New GST online filing
The first steps towards tax simplification lie in the new option for taxpayers to file GST returns online. Inland Revenue has been working with two software providers to pilot a service so taxpayers can file their GST returns directly from their business software. At present this can be used for GST only returns or for combined GST and provisional tax returns. This option is not open to taxpayers who use the ratio option to calculate provisional tax.
To use this service you need two things: you need to be using the software but you also need confidence that your systems are set up to capture your GST position correctly. You want to be sure you won't be exposed to tax penalties for underpayment further on.
If you would like to discuss this further please contact us.
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In April, the Government announced proposals to simplify business tax, with legislation to be passed in August this year. If the legislation is passed the earliest of the changes would take effect from April 2017, with more coming online in 2018. Here is a summary of the intended changes:
From 1 April 2017
|Use of money interest
||Taxpayers using the standard uplift method (paying 105% of last year's tax bill) will no longer be charged interest if they underpay at their first and second provisional tax dates, provided they pay the income tax they owe at their last provisional tax date.
Businesses and individuals who have residual income tax below $60,000 will also not be subjected to interest. It is expected that 67,000 taxpayers will benefit from this.
||Incremental late payment penalties will be removed from new debt for goods and services tax, income tax and working for families tax credits.
|Credit reporting of tax debt
||Inland Revenue can disclose significant tax debts to credit reporting agencies, so that other businesses considering extending credit can make more informed commercial decisions.
||Inland Revenue can share information with the Registrar of Companies to help enforce company law requirements. This will help weed out non-compliant companies continuing to trade with an unfair commercial advantage over compliant businesses.
|Withholding tax and schedular payments
||Contractors will be able to elect their own withholding tax rate.
Contractors working for labour-hire firms can be covered by withholding tax.
Contractors and their payers can forge voluntary withholding agreements so that contractors can have tax withheld on a payday basis, reducing the impact of provisional tax.
From 1 April 2018
|A new way to calculate and pay provisional tax
||The accounting income method (AIM), which will be available to taxpayers with turnover of $5 million or less, will allow those who have IRD-approved accounting software to pay income tax on a two-monthly basis. Up to 110,000 taxpayers will be eligible.
Companies can pay tax as agents for shareholder-employees in respect of their shareholder-employee salary. This will reduce the impact of provisional tax for shareholder-employees.
But what will it mean for me?
The outcome of the consultation phase on tax simplification may still change how or whether some aspects are implemented but it seems certain that the broad outline of the changes will go through.
Best case scenario for small businesses: this should reduce complexity and make it easier to pay tax. You'll pay tax more frequently based on your business' actual income. You may end up paying less in tax, penalties, and interest. However paying tax more frequently may require you to keep a closer eye on cashflow to keep money coming in to pay the bills.
Worst case scenario for small businesses: you may end up paying more tax if you don't stay aware of your tax obligations and ensure the accuracy of the data input into your business software. We can assist you with regular monitoring and checking your systems are accurate and fit for purpose.
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Mileage rate changes
Inland Revenue announced in May that the Commissioner had reduced the mileage rate from 74c to 72c/km for the 2016 tax year (1 April 2015 to 31 March 2016 for standard balance dates). If you rely on the standard mileage rate when reimbursing your team for travel, make sure your payroll system is updated to reflect the reduced rate.
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