Tax Pooling
Tax pooling is an established industry with registered, IRD approved intermediaries, but what is it exactly?
What is tax pooling?
Some businesses, like big trading banks, choose to overpay their tax when they have the funds. Meanwhile, other businesses struggle to pay their tax on time. Tax pooling is about bringing these taxpayers together.
Businesses that like to overpay their tax, put it into a tax pool with a registered, IRD approved tax pooling intermediary. Any businesses that struggle to pay their tax on time, or that may want more time, can buy that prepaid tax through the tax pooling intermediary, but not have to pay for it until a later date.
There’s a limit on how much later you must pay for prepaid tax. It can be up to 75 days after the terminal tax date. This can be particularly helpful for provisional tax payments which must be made up to 586 days before the terminal tax date.
Tax pooling in New Zealand started in 2003. Inland Revenue threw their support behind the idea to save taxpayers money and make managing tax easier. Tax pooling is now an established industry with registered, IRD approved tax pooling intermediaries.
How does this help?
An ordinary taxpayer who struggles to pay their tax on time can avoid the IRD penalties for late payment. This is a 1% penalty immediately on missing a tax payment date, and another 4% if the payment hasn’t been made in the next 7 days. Additionally, IRD will charge Use of Money Interest (UOMI) at an rate which is linked to market interest rates, currently about 10% pa.
Alternatively, by tax pooling, you’ll be charged interest at a lower rate than IRD, and there are no late payment penalties. The savings can be quite considerable, plus there’s a cash flow benefit. This cash flow benefit may interest ordinary taxpayers who could pay their tax on time, but need the money for other purposes, such as funding an asset acquisition.
Bare Bones Accounting uses Tax Management New Zealand for our clients’ tax pooling arrangements. We can obtain a quote for any scenario, and once that quote is confirmed, the arrangements are locked in place. You can opt to pay by instalment or in one lump sum. And if you choose to pay earlier, the cost will be reduced.
What about an IRD instalment arrangement?
Another option is to apply to IRD to pay tax through an instalment arrangement. If this is organised before the tax is due, you’ll avoid IRD penalties, as long as you continue to make all the agreed instalment payments. You’ll still be charged Use of Money Interest (UOMI) on these arrangements.
The differences between tax pooling and an IRD instalment arrangement
The interest IRD charge is slightly more than with tax pooling.
The IRD instalment arrangement is less flexible and requires a minimum, regular weekly, fortnightly or monthly payment, starting a month after the application date.
Tax pooling generally only applies to income tax, while an instalment arrangement can be used to pay any type of tax, including GST.
To make sure you’re putting enough money aside for tax, follow our simple guidelines. Contact Mike if you’d like advice or help with tax pooling or an instalment arrangement.
Call Mike for advice 021683783 or email us today, we can help:
