Don’t cry about UOMI
Tax Alert - February 2023
By Joe Sothcott & Veronica Harley
Navigating the use-of-money-interest (UOMI) rules can be tricky for many taxpayers, particularly when it comes to paying and managing provisional tax. As the New Zealand Reserve Bank increases the Official Cash Rate in response to inflation, so too have Inland Revenue’s UOMI rates risen. On 17 January 2023, the UOMI under payment rate increased to 9.21% (from 7.96%) while the overpayment rate increased to 2.31% (from 1.22%). So you might be wondering how the rates are set, what triggers an increase and what might be in store for 2023?
What is UOMI?
UOMI is interest that Inland Revenue charges on overdue or underpaid tax payments. UOMI applies to many taxes and duties, specifically income tax, goods and services tax (GST), and fringe benefit tax (FBT), as well as duties such as customs duty and excise duty. But most commonly taxpayers will come across these rules if they pay provisional tax.
If taxpayers fail to pay their taxes on time, Inland Revenue charges UOMI on the outstanding amount. This is in addition to any penalty that might be imposed. UOMI on underpayments of tax is set above market rates to incentivise taxpayers to pay their taxes on time and compensate the government for not receiving the payment when it was due.
UOMI also applies to overpayments. The UOMI overpayment rate is set below market rates as it is intended to be compensatory rather than providing taxpayers with a financial benefit.
While pundits may disagree given the unfavourable rates, UOMI is not actually a penalty. This means interest paid is tax deductible and conversely interest received is assessable.
How are UOMI rates set?
The methodology for calculating rates is prescribed in a regulation. The underpayment rate is set as the Reserve Bank’s floating first mortgage rate for new customers in the housing market, plus 2.5%. The overpayment rate is either 0% or the Reserve Bank’s 90-day bill rate minus 1%, whichever is higher.
An adjustment to the UOMI rates happens when either:
- The Reserve Bank’s 90-day bank bill rate or the floating first mortgage new customer housing rate moves by 1% or more from the figures used to calculate the last rate change; or
- One of these indexes moves by 0.2% or more, and the UOMI rates haven’t been adjusted in the last 12 months.
The effective date of an adjustment to UOMI rates will typically be the day after the next standard method provisional tax payment date. In the most recent increase, 17 January 2023 was the first working day following the second instalment of provisional tax for a March balance date.
What to expect in 2023
This increase in UOMI rates is actually based on data from August 2022 and because of further interest rates rises since this time, (not to mention a potential increase in late February in the Reserve Bank indexes), a further UOMI rise could be on the horizon in 2023. Inland Revenue typically want to avoid a mismatch between the UOMI rates and market interest rates, so it is possible the UOMI rates might increase again with effect from 8 May 2023, being the day following the third provisional tax payment date for the standard method.
So how to manage exposure to UOMI when it comes to provisional tax
Particular rules operate for applying UOMI on provisional tax depend on the level of residual income tax a person has in a year. If the person’s residual income tax will be under $60,000 and they use the standard method of calculating provisional tax, then they qualify as a “safe harbour taxpayer”. Broadly, the standard method calculates instalments using the prior year’s residual income tax. A safe harbour taxpayer can pay all their residual income tax in a single instalment on their terminal tax date and is only liable to pay UOMI after this date has passed.
Taxpayers with residual income tax of more than $60,000 will be “interest concession provisional taxpayers” if the standard method has been used. In this case, UOMI will apply from the day after the final provisional tax instalment is due if there is a difference between the actual residual income tax liability and the total amount paid by the final instalment. As the last instalment of provisional tax occurs after the end of a taxpayer’s year (i.e. the 13th month), theoretically the taxpayer should have better information about the year’s results and so should check and top up the final instalment amount accordingly if needed. This will limit, or in some cases remove entirely, the amount of UOMI a taxpayer may be subject to.
However, many taxpayers have experienced fluctuating income over the past few years and so making payments based on the standard method throughout the year can be problematic in terms of managing cash flow as the year progresses. In these situations, tax pooling is a great option to consider.
What about tax pooling?
Tax pooling is an invaluable tool for taxpayers as it provides flexibility in managing income tax obligations, which means (amongst other things) taxpayers can pay their tax as and when suits their cashflow. Tax pooling also mitigates the uncertainty of ‘uplift’ payment obligations, by providing taxpayers with a means of topping up any shortfalls/missed payments throughout the year. Tax pooling is particularly helpful in our current uncertain and turbulent economic climate and the use of tax pooling is growing steadily. Taxpayers who use tax pooling also reduce their exposure, by up to 30%, to Inland Revenue late payment penalties and UOMI. All of this is Inland Revenue-approved, enshrined in legislation, and has been part of New Zealand’s tax landscape since as far back as 2003.
We recently spoke with Tax Traders on current trends in the payment of provisional tax. According to Erik Chamonte, Tax Counsel at Tax Traders, many more larger taxpayers are currently financing their tax (paying a small interest amount upfront, and settling the principal tax amount at a later date) for longer durations than previously (now typically close to, or more than, a year). Erik notes that many SMEs are still financing their tax for shorter durations, but are extending these terms and ‘rolling’ their finance arrangements out when they mature. It is apparent, from these trends, that keeping cash in the business is paramount to many businesses at present. At Deloitte, we have custom tax pooling software integrated into our system to efficiently access the benefits tax pooling has to offer for our clients.
If you have any queries about UOMI, please get in touch with your usual Deloitte advisor.
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