How to pay provisional tax when it suits you

Tax pooling is an IRD-approved service offered by our partner, Tax Management NZ that alleviates some of the provisional tax system’s challenges.

It does this by offering another way for taxpayers to pay their income tax.

One of the big problems with provisional tax is IRD expects payments to be made on dates it sets – no matter when a business earns their income or the state of their cashflow. They will charge late payment penalties for failure to pay on time.

Another bugbear is the large differential between the interest IRD charges when a tax payment is missed or underpaid (currently 8.35 percent) and what it pays (currently 0.81 percent) when a taxpayer pays too much tax for the year.

Tax pooling remedies these issues.

For starters, it offers taxpayers greater payment flexibility, without having to worry about incurring IRD interest and late payment penalties. A taxpayer can enter an arrangement that allows them to defer the full payment to a time in the future that better suits their business cashflow or chip away at what they owe in instalments.

Tax pooling also closes IRD’s wide interest differential by allowing a taxpayer to earn a greater return if they overpay tax for the year and reduce their interest cost and eliminate late payment penalties if they miss, underpay or are reassessed by IRD.

There are two aspects to tax pooling:

• Paying through the pool; and

• Depositing into the pool.

Each one will suit different taxpayers.

A tax pooling provider is registered with IRD and holds an account at IRD into which date-stamped tax payments are made and held. They operate under legislation set out in the Income Tax Act 2007 and Tax Administration Act 1994.

The service can assist with provisional or terminal tax payments for the current tax year or one just completed as well as historic income tax and other tax types such as GST, PAYE, RWT, NRWT and FBT if a taxpayer receives a notice of reassessment from IRD.

Tax pooling has been operating in New Zealand since 2003 after the government passed legislation

Please contact us if you would like to know more about tax pooling and how it works.