Is there any benefit to tax pooling under the new provisional tax rules?
Tax Alert - August 2017
By Liz Nelson and Vicky Yen
You will probably be aware of the changes made to the provisional tax rules with effect from the 2018 income year (refer to our March Tax Alert).
We have all either heard about, or been in the position of, someone who has been stung by use of money interest (UOMI) due to an unexpected increase in profits or a foreign currency swing.
In summary, the changes mean that from the 2018 income year, UOMI will only apply from the date of the third instalment for taxpayers who use the standard uplift method of calculating provisional tax for all instalments before the final instalment.
Taxpayers can breathe a sigh of relief that they will no longer be punished for profit growth.
The question remains, what are the benefits of using a tax pool under the new provisional tax rules?
The CEO of New Zealand’s largest tax pool, Chris Cunniffe, says Tax Management NZ will provide clients with flexibility and options not otherwise available to them that will smooth any rough edges that remain under the new regime.
We have set out below some of the benefits.
1. Ability to earn interest
Some taxpayers pay provisional tax directly into a tax pool, to be transferred to Inland Revenue once their tax liability has been finalised.
Under the new provisional tax rules, if you pay provisional tax directly to Inland Revenue under the standard uplift method, and your final tax liability ends up being less than under standard uplift, no UOMI will be received until the final instalment.
On the other hand, the tax pooling intermediaries have advised that amounts paid into a tax pool on each provisional tax instalment date will still be eligible to earn interest (albeit at the rate of 1.02%).
There is also the potential to sell overpaid tax to other taxpayers to obtain a higher rate of interest (although we expect this will be less of a benefit going forward, as most taxpayers will pay based on the standard uplift method and will not need "top-ups" at the earlier instalments).
2. Decreasing profits
The new provisional tax rules are appealing in an environment of climbing profits. However, what if you expect profits to decline?
If you make provisional tax payments to Inland Revenue, you have two choices: pay based on the standard uplift method (which is likely to result in overpaying at the first two instalments, with no UOMI receivable); or take a risk and pay based on an estimate. The second option will expose you to UOMI if your estimate is not accurate.
Tax pooling provides a third option, allowing you to make payments directly into a tax pool based on your forecast without filing an estimate. Provided an estimate is not filed, the new rules will only charge UOMI on the lesser of your actual tax liability, paid in equal instalments, or your tax liability under the standard uplift method.
This gives the protection of the standard uplift method in the event there is an upswing in profits, provided you are able to source top up tax from the tax pool.
The tax pooling intermediaries we have spoken to are confident there will be sufficient tax pool stock to meet taxpayers’ purchase requirements.
3. Increasing profits or missed payments
Under the new provisional tax rules, there will still be cases where mistakes are made or the precise tax liability cannot be calculated by the final instalment.
Taxpayers will still have the ability, provided the time restrictions are met, to purchase tax from a tax pool in order to pay for missed instalments or to top up the final instalment of provisional tax.
4. Accessing refunds earlier
Getting a refund of provisional tax that has been paid to Inland Revenue is no simple task – the typical request is subject to long processing times, can only be processed after the tax return for the relevant year is filed, and is also subject to the requirement that the taxpayer has sufficient imputation credits.
Refunds of tax payments made to a tax pool are not subject to these restrictions, and can be paid out to the taxpayer within 3-5 working days, at any time during the year.
5. Working capital and cash flow management benefits
Tax pooling intermediaries are coming up with increasing options to help taxpayers meet their provisional tax obligations.
Most tax pools offer tax financing, allowing taxpayers to postpone tax payments at a competitive interest rate to free up working capital.
Taxpayers with irregular or unpredictable cash flows can choose to pay in flexible instalments or lump sums rather than fixed instalment amounts at set dates. Again, the interest rate is much lower than what IRD charges for missed/underpaid tax.
Further, the deposited funds can be drawn from as a line of credit as an additional source of cash if required.
These options can provide taxpayers with flexibility to manage tax payments in a way that better aligns with their cash flow requirements.
6. Audit / Voluntary Disclosures
Tax pooling will still be relevant in cases of increased assessments, either as a result of an Inland Revenue audit or through the voluntary disclosure process.
Provided specific requirements are met, taxpayers can purchase funds from tax pooling intermediaries in order to settle tax liabilities arising from increased assessments. The advantage of this is lower interest rates and potentially the elimination of late payment penalties.
- Think about when you file your tax return - some taxpayers may benefit from deferring or accelerating filing their income tax returns in order to secure a lower standard uplift liability for the first two instalments. Remember that the standard uplift method is calculated based on your last filed tax return.
- The concessionary UOMI rules will not apply if the amount paid is not correctly calculated under the standard uplift rules. Additional care should be taken by taxpayers who are changing tax balance dates, as they may be subject to different instalment dates and special rules for calculating uplift liabilities.
For specific advice on the new provisional tax rules or tax pooling, please contact your Deloitte tax advisor.
August 2017 Tax Alert contents