Provisional tax: How to avoid being stung by the IRD interest rate rise

For many of our clients, the first instalment of provisional tax for the 2019-20 income year is due on 28 August – and the cost of failing to pay on time is set to increase.
 
That’s because IRD is increasing the interest it charges for unpaid or underpaid tax from 8.22 percent to 8.35 percent.
 
The new rate takes effect the day after the 28 August provisional tax payment.
 
Given that, we thought it would be an opportune time to go over some provisional tax basics to avoid getting into strife. 
 
We also thought we would mention the services of Tax Management NZ (TMNZ) for those requiring greater payment flexibility or wanting to manage their cashflow. 
 
What provisional tax method should I use?
 
We recommend taxpayers use the standard method (also known as ‘uplift’) to pay provisional tax.
 
The reason why is:
  • It provides certainty around the amount due at each instalment.
  • No IRD interest if you pay the uplift amount on time and in full at each provisional tax date, and your income tax bill for the year is less than $60,000. (Any final balance to settle what’s owed for the year is due at your terminal tax date.) 
 
If you choose to use the estimation method, IRD expects you to pay your income tax bill for the year in equal instalments. They will charge interest if tax is underpaid at any of your provisional tax dates.
 
How much is due?
 
Generally, those using the standard method to pay their provisional tax will pay on a 105 percent uplift of last year’s income tax liability.
 
Once they have this figure, they divide it by the number of instalments payable for the year to work out the amount due at each date. Most taxpayers generally pay three instalments of provisional tax.
 
What happens if last year’s return has not been filed by 28 August?
In this instance, you will pay provisional tax based on a 110 percent uplift of your income tax liability from two years ago.
 
You will use the 105 percent uplift calculation as the basis for your remaining payment(s) once the previous year’s return has been filed.
 

TMNZ provides greater payment flexibility if you’re short on cash

The IRD-approved tax pooling service provided by TMNZ can help those who might struggle to pay their provisional tax on 28 August or have a more productive use for the money they have set aside for tax.

How?

TMNZ pays date-stamped tax into its IRD account on each provisional tax date for taxpayers wanting the option to pay in a manner or at a time that suits them, without having to worry about IRD late payment penalties.

There is some interest to pay – but it is less than what IRD charges (up to 30 percent cheaper with TMNZ).

Those entering an arrangement with TMNZ make their payments when it suits their cashflow and TMNZ allocates the tax they need to their required provisional tax date(s).

As the tax TMNZ 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 you paid 28 August provisional tax on time when they complete the transaction. This, therefore, eliminates late payment penalties.

TMNZ can also be used for past payments. We recommend those who believe this year is going to be less profitable than last year to pay 28 August provisional tax based on how business is currently performing, because they can use TMNZ to retrospectively top up this payment if things pick up later.

As always, feel free to contact us if you have any questions about provisional tax or TMNZ. We’re happy to answer any questions.

 

 

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