Article

Provisional tax changes: Two years on

Tax Alert - November 2019

By Liz Nelson & Vicky Yen

We are now two years into the provisional tax and concessionary Use of Money Interest (UOMI) rules which were updated from the 2018 income year onwards. In summary, these rules meant UOMI would generally only apply from the last instalment date, provided tax was paid under standard uplift correctly and on time.

How has Inland Revenue in fact been applying the rules operationally? How have taxpayers’ payment behaviours and tax pooling been impacted? What other legislative amendments are in the pipeline?

We have partnered with Tax Management NZ (TMNZ) to share some of our observations below.

Please note that safe harbour taxpayers are subject to other additional rules which are not covered by this article. If you have any questions please contact your usual Deloitte tax advisor.

Calculating uplift liabilities - the lesser of 105% and 110%?

It has come as a surprise to many that the standard uplift and UOMI calculations are not as clear as originally thought.

The general understanding was that taxpayers’ standard uplift obligations should be calculated based on the most recently filed return (so either 105% of prior year RIT, or 110% of RIT from two years prior if the prior year return has not yet been filed), and that uplift for purposes of the UOMI rules would be determined on the same basis. As a result, we have seen many taxpayers make conscious decisions to delay or accelerate filing their prior year tax returns in order to benefit from lower provisional tax uplift liabilities.

Operationally however, Inland Revenue’s system has applied a more flexible approach to taxpayers’ advantage:

If 105% is lower than 110%, 105% will be applied retrospectively to any previous instalment(s), irrespective of when the tax return is filed.
If 105% is greater than 110%, uplift can be calculated based on the lower 110% amount for instalments prior to when the tax return is filed.

An amendment has been included in the Taxation (Kiwisaver, Student Loans and Remedial Matters) Bill, to retrospectively align legislation on UOMI calculations to what Inland Revenue’s system is doing operationally. However, this amendment does not change the calculation of amounts payable under standard uplift, which remains based on the most recently filed return notwithstanding UOMI may not be charged on that basis. We are seeking further clarification from Inland Revenue on the inconsistency between uplift vs UOMI calculations and its expected implications.

Should I be filing an estimate?

Taxpayers still have the option of filing an estimate, if they believe their tax liability will be less than that calculated under the standard uplift method. However, the downfall of filing an estimate before the final instalment is that you automatically fall out of the concessional UOMI rules and will be charged interest if payments are not exactly aligned to what your final tax liability is for the year.

This can also have a flow-on affect to any provisional tax associates, as they will fall out of the concessional UOMI rules as well.

Therefore, our general advice would be to be very wary of filing estimates. If you do expect your tax liability to be less than that calculated under the standard uplift method, tax pooling is a good option for managing this (without filing an estimate and falling out of the concessionary rules).

However, there has been some confusion as to whether taxpayers need to file an estimate if they pay less than uplift at the final instalment.

Under current legislation, the technical position is that an estimate should be filed in such instances.

The Taxation (Kiwisaver, Student Loans and Remedial Matters) Bill includes proposed amendments such that from the 2019-2020 year, if taxpayers wish to remain under the UOMI concessionary rules, they can still pay an amount based on expected RIT for the year instead of uplift at the final instalment without filing an estimate.

Tax pooling

Tax pooling remains a useful tool to manage provisional tax obligations under the concessionary UOMI rules. The key benefits were discussed in our previous article. In summary, tax pooling provides taxpayers with the flexibility and hindsight to obtain optimal interest / penalty outcomes and cash flow benefits.

In recent discussions with Inland Revenue, inconsistencies have been highlighted between the rules used to calculate tax due at each instalment, compared to the (sometimes lower) amount that would be subject to UOMI at the end of the year.

Inland Revenue has clarified that the UOMI calculation is not a method for calculating the amount of provisional tax due at each instalment. At each instalment the methods as set out in the Income Tax Act 2007 (uplift, estimation, AIM etc.) should be used.

At the end of the year taxpayers who use tax pooling could potentially align their tax payments to the UOMI calculation without being exposed to interest or penalties. This may result in an additional cash advantage from deferring tax payments due at earlier instalments to the final instalment. However, taxpayers should be aware that this approach would not meet the “uplift” payment requirements to qualify for the UOMI concessionary rules. This would become especially relevant if, for example, the tax period is later subject to a reassessment (noting that the impact of reassessment could be mitigated if tax pools have a sufficient supply of tax which can be used for the appropriate tax pool arrangements).

Payment behaviour

Inland Revenue’s rationale behind the UOMI rule change was to ensure taxpayers no longer carried a deadweight cost in the form of overpaid tax at earlier instalments. This appears to have been achieved.

TMNZ comments that the overall trend has been larger payments at the final instalment date, although this has not been as large as expected, as payment behaviour is still influenced by other factors such as a need to top up imputation credits at earlier instalment dates for dividend payments.

The rules have provided additional certainty and potential to defer a significant part of tax payable to the final instalment. This has in particular benefited taxpayers who have previously been in losses or had low levels of income, and also taxpayers with highly volatile income.

Taxpayers are now mostly familiar with how the 2018 rule changes apply in standard cases, however the rules can still be tricky to apply in unusual circumstances (e.g. non-standard number of instalments, transitional years etc.). In all cases it can be worth checking that Inland Revenue’s systems have calculated the correct outcome (which does not always happen!), and working with your usual Deloitte tax advisor and tax pool support staff to identify potential savings or opportunities.

Other legislative amendments to be aware of

The following provisional tax amendments are part of the Taxation (Kiwisaver, Student Loans, and Remedial Matters) Bill.

Removing the ability for taxpayers to choose the provisional tax instalment to which a payment is applied. The Commissioner will instead allocate the payment to the oldest debt first. Taxpayers could face further interest and late payment penalties at future instalment dates if they miss or underpay one of their earlier provisional tax payments.
Clarifying late payment penalties charged at the final instalment. This is to correct an inadvertent legislative change and align to Inland Revenue’s current approach, which calculates late payment penalties at the final instalment on the lower of the uplift instalment amount, or actual RIT divided by the number the instalments for the year.
Clarifying provisional tax truncation. When Inland Revenue’s system truncates provisional tax amounts to whole dollars, payment of those whole dollar amounts (rather than the amount including cents) will be deemed as satisfying the required liability for UOMI concessions.