Business Transformation and the rise of tax pooling

Tax Alert - September 2015

By Iain Bradley and Paul Dixon

Inland Revenue (IR) have released two papers recently outlining the proposed Business Transformation Process and seeking input from taxpayers on the suggestions and questions outlined therein. These papers are:

  • Better Digital Services Paper; and
  • “Making Tax Simpler” Green Paper.

This article looks at the potential greater use of tax pooling and how tax pooling factors into the business taxation section of the Green Paper and the Green Paper’s proposed re-think of the provisional tax system (referred to in the Green Paper as “business taxation”).
Business Taxation Transformation

The Green Paper sets out reasons why the current provisional tax system is not working. The issues that taxpayers face were identified as:

  • High use of money interest exposure;
  • Cash flow concerns; and
  • Compliance costs.

The Green Paper also discusses potential changes / overhaul of the provisional tax system to alleviate these issues. As a solution it is suggested that the “payment of business income tax could be done more “on account” as income is earned during the year – much like a PAYE system for businesses.” Additionally, the Green Paper considers whether the calculation of provisional tax could be changed to be calculated in accordance with:

  • Accounting profits (after being adjusted for key non-taxable items); or
  • A bespoke percentage of a business’ turnover.

In short, the solution and different calculation method suggestions do not appear to adequately alleviate the three issues outlined as the reason behind a potential provisional tax review. It is likely that each of the issues outlined above will simply affect any new method of paying tax/tax obligation calculation method, particularly if the number of tax instalments increased.

One of the key comments from the Green Paper is that any solution should consider and “[make] use, as much as possible, of existing business processes and technology” and “[make] it easier to comply” for taxpayers. While the review process offers a chance for taxpayers to seek an optimal position for provisional tax, these changes (if any) will likely still be some years out and may not be as optimal as taxpayers will push for. However, there is a business process and technology that already exists in the form of “tax pooling” and part of the solution could readily be the wider application of tax pools across small to medium enterprises which will likely alleviate (but not necessarily remove) the majority of the issues outlined in the Green Paper.

What is Tax Pooling?

To give some background, tax pooling is a government approved scheme whereby ‘approved intermediaries’ operate tax pooling accounts with IR. Taxpayers will then pay their provisional tax payments directly into a tax pooling trust account at IR held by independent trustees (the tax pool). These funds can then be used to meet the taxpayer’s tax obligations. However, where the taxpayer has funds deposited with a tax pooling intermediary in excess of the amount it needs to satisfy its tax liabilities, the intermediary can arrange to sell excess deposits to other taxpayers. Similarly, taxpayers, who are in a position where they have not paid enough tax and need a top up, can purchase the deposits which can then be applied to settle their tax obligations. The role of the intermediaries is to match people who have excess deposits with those who have underpaid tax, effectively increasing the return on overpayments and reducing the Use of Money Interest (UOMI) on underpayments.

Is Tax Pooling the Solution?

Chris Cunniffe, CEO of Tax Management New Zealand, observes that tax pooling is already used by thousands of taxpayers to achieve the same goals set out in the Green Paper.
He goes on to state that, “In our role as a tax pooling intermediary, we already address many of the concerns identified in the Green Paper. After all, tax pooling legislation was introduced to provide taxpayers with more certainty, minimise UOMI exposure while still incentivising taxpayers to pay the correct amount of tax to IR. tax pooling has also evolved over time to allow taxpayers to finance their provisional tax payments, providing taxpayers the flexibility to pay their tax when it suits them, instead of when IR tells them to. In uncertain economic times and with UOMI rates sitting at 9.21% for underpayments and 2.63% for overpayments, it is important for all businesses to understand how tax pooling can be used to help their businesses.”

Tax pooling can help in the following scenarios:

  • Taxpayers can reduce UOMI and eliminate late payment penalties by purchasing backdated tax from a tax pool to settle unpaid/underpaid income tax for current year tax liabilities. 
  • Taxpayers can purchase historical tax credits from a tax pool where IR has reassessed, following an audit or voluntary disclosure. Historical tax purchases can be made for income tax, PAYE, fringe benefit tax, resident withholding tax, non-resident withholding tax and GST.
  • Taxpayers can improve their cash-flow during provisional tax dates by financing their tax through a tax pooling intermediary. The funding cost is usually much lower than short term funding rates provided by a bank. For example, if a taxpayer wanted to defer a 28 August 2015 provisional tax obligation of $10,000 to a later date i.e. let’s say August 2016, it would only cost the taxpayer $538 to defer this payment. This interest payment is calculated at the rate of 5.65% and will vary depending on the length and size of the arrangement.
    Impact on Your Business

Until the Green Paper progresses and more definitive issues papers are released there is no change to taxpayers’ current provisional tax obligations or processes. However, the question is, should you and your business already be using tax pooling to help deal with the concerns/costs that are driving this shake up of the provisional tax system?

If you would like to discuss the potential use of tax pooling and the benefits it could provide to you and your business please contact either your usual Deloitte tax advisor or Paul Dixon on (09) 303 0722.

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