Further UOMI relief available for some provisional taxpayers for the 2021 year. Will you qualify?
Tax Alert - September 2020
By Veronica Harley
In early August, the Government introduced and enacted under urgency the COVID-19 Response (Further Management Measures) Legislation (No 2) Act 2020. The key measure from a tax point of view is a new use of money interest (UOMI) relief rule (“section 183ABAC”) to supplement the earlier rule (“section 183ABAB”) which has applied since 15 April 2020.
Why is the additional rule required?
The first rule, section 183ABAB of the Tax Administration Act 1994, allows the CIR to remit UOMI where the taxpayer’s ability to make a payment was significantly adversely affected by COVID-19. It applies where UOMI is charged immediately for a missed payment, i.e. where the amount of actual tax owing is certain. But it has now been made clear by Officials that it doesn’t cover interest charged for not getting provisional tax instalments correct.
Many taxpayers have since noted that, because of COVID-19, it is difficult to forecast their tax liability for 2021. For those affected by COVID-19, all they know now is that the standard method and the uplift options may be in excess of their actual 2021 liability. Taxpayers might look to estimate 2021 provisional tax, but the UOMI risk is too great because of uncertainty of how the year will yet play out. If a person switches to the estimation method at any point, UOMI will apply from the first instalment. If a safe harbour taxpayer short pays any instalment, they risk dropping out of safe harbour rules and incurring UOMI.
Who qualifies for the new relief rule?
First, it will only apply to those taxpayers who will be a provisional taxpayer for the 2021 income year and have residual income tax of $1 million or less. Therefore, it is targeted to small and medium enterprises. Large taxpayers are deliberately excluded from seeking this relief because they are more likely to be able to use tax pooling intermediaries to manage UOMI issues. But more on that later.
Second, the rule will apply if the ability to make a reasonably accurate forecast on one or more provisional tax instalment dates for 2021 was significantly adversely affected by COVID-19 and the taxpayer:
- Has estimated 2021 provisional tax on or before P3; or
- Used the standard uplift method, but short paid the last instalment (i.e. they paid the expected RIT); or
- Would be a safe harbour taxpayer, but for the fact they did not pay all instalments in full.
Further, any interest payable must not have arisen from a loss carry back election. The other points to note are that the 2021 return must be filed, terminal tax must be paid before relief can be applied for, and the taxpayer must apply for interest remission as soon as practicable thereafter.
This is hugely positive and will help some struggling taxpayers at the small end of town. The key to this section applying is being able to demonstrate to the Commissioner that COVID-19 has “significantly adversely” affected a taxpayer’s ability to be able to forecast their provisional tax payments accurately. For example, COVID-19 factors such as border restrictions, lock downs, the inability to trade fully or at all, problems with supply, lack of tourists etc will all be factors that give rise to uncertainty presently. For standard balance dates, there is still 7 months to go for the 2021 income year and it is difficult to predict what might happen. Will there be further lock downs, or will things improve? Who knows? The other important point to note is that those taxpayers that can pay their instalments and who are not affected by COVID-19 will not qualify for this relief. Nor will those that make no effort to try to forecast their 2021 liability. For those taxpayers where the relief provision won’t apply or there is uncertainty whether it will, tax pooling will still be a valid option.
Thoughts from a tax pooling intermediary
Kathleen Payne, the Strategic Partnerships Manager at tax pooling intermediary Tax Management NZ, believes tax pooling provides certainty of the outcome for those who don’t want to or can’t apply for the remission. It allows the taxpayer to manage tax payments in a way that better aligns with their cash flow requirements while reducing the impact of UOMI. Unlike with Inland Revenue, acceptance is guaranteed and there is no need to provide any security either.
Payne says if taxpayers face uncertainty regarding their provisional tax position, there are several tax pooling options they could use.
She agrees that those who are ineligible to receive any relief under section 183ABAC should refrain from estimating their provisional tax and instead continue to use standard uplift. They should pay based on the lower of standard uplift or the forecast residual income tax. If it turns out they have underpaid, they can top up using the pool at low market interest rates and eliminate late payment penalties. Electing standard uplift means they enjoy the protection of UOMI being capped at the lesser of uplift or a third of the actual liability if tax for the year is underpaid.
One of the options for larger taxpayers who cannot use the concession is to make their tax payments into the pool, reviewing the position at each payment date and waiting until the end of the year to make transfers to Inland Revenue of the actual liability. This gives them the flexibility to obtain a quick refund of tax if they have overpaid, without having to file a return or estimate, or top up if underpaid. Refunds may be subject to meeting Anti-Money Laundering (AML) requirements. Corporate taxpayers need to be mindful of imputation credit account impacts when requesting a refund of tax they hold in the pool.
Where preserving cash is of primary importance, a taxpayer can use a tax pool to defer their provisional tax payments to a date in the future. For someone with a 7 April terminal tax date, they would have until mid-June 2022 to settle their provisional tax for the 2021 tax year. A taxpayer could pay a fixed interest fee upfront and then the core tax at an agreed future date. If their tax position changes before they reach the maturity date and less tax is required, they would simply pay less. Alternatively, they can choose to pay the full amount of tax plus interest at a date in the future once the amount due is known.
September 2020 Tax Alert contents
- Further UOMI relief available for some provisional taxpayers for the 2021 year. Will you qualify?
- COVID-19 represents unique opportunity for businesses to reconsider their options when it comes to motor vehicles