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Tips to keep on top of your tax obligations

TAXATION

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Over the past few years, businesses all around New Zealand have been under pressure and feeling the economic pain and this is likely to continue with New Zealand’s economy entering recession in the March 2023 quarter.

This has led to a rise in the number of liquidations of companies, including some high-profile ones in the construction sector.

Not all liquidations are instigated by Inland Revenue, but we are seeing a rise in the number of those that are. Inland Revenue takes a particularly dim view of taxpayers that don’t pay PAYE and GST on time.

Even when times are tough, it is important to keep your tax affairs in order as the cost of interest and late payment penalties can add up quickly. So, what can you do to help keep in Inland Revenue’s good books?

Keep on top of filing your returns

During challenging times, you need to keep up to date with the filing of all your returns even if paying the associated tax is difficult, to avoid late filing penalties being applied. Late payment penalties from $50 to $500 so can quickly add up if you are late.

Make sure you avoid UOMI

Use of Money Interest (UOMI) is paid by either the Commissioner or a taxpayer when tax is under or over paid and applies to most taxes. The current rate charged by the Commissioner on under payments is 10.39% and the rate paid on over payments is 3.53%. The high interest rate charged gives incentive to ensure payments are made on time to minimise your overall interest costs.

Provisional tax payments and tax pooling

Provisional tax payments due are primarily paid based on an uplift from the most recent income tax return which has been filed.

If you are forecasting that your results for the 2024 year will be worse than 2022 or 2023, then paying provisional tax based on the uplift method may not be best from a cashflow perspective. While you can estimate your current year liability and pay a lower amount based on that estimate, we don’t usually recommend this as it exposes you to possible penalties if that estimate turns out to not be fair and reasonable when you get to the end of the year.

A better option is to make use of tax pooling. Tax pooling intermediaries operate tax pooling accounts with Inland Revenue, allowing taxpayers to deposit income tax payments into tax pooling trust accounts which are then transferred to Inland Revenue once the tax returns have been filed and the final tax liability known.

Tax pooling is particularly useful when there are decreasing profits or missed payments. It can also allow taxpayers to postpone tax payments (at a competitive interest rate) to free up working capital or better match your cashflow if you have a seasonal business.

Set up instalment arrangements

If your business is unable to meet any of your tax payments on time you may be able to apply for an instalment arrangement to pay the debt off over time.

It is important to be talking about this as an option with Inland Revenue before your payments fall due, not once they are already overdue. Essentially you will need to agree on an instalment amount and payment start and end dates.

Inland Revenue may ask for financial information to support the application that tax payments can’t be made. But the overriding condition is that you will need to agree to pay the tax as quickly as possible.

In other words, this is not a holiday or deferral from paying tax. A 1% penalty (instead of potentially 5%) will still be applied upfront, but Inland Revenue has discretion to remit this down the track if the business complies with the arrangement.
In tough times, tax obligations can cause extra strain on business cash flow and liquidity.

It is important to make sure you keep communicating with the IRD to avoid penalties, fees and liquidation commencing.

Make use of the options available and if you have any questions or would like help navigating options available to you, please seek advice from your tax accountant or adviser.

Related: Year-end tax considerations

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Andrea Scatchard
Andrea Scatchard
Andrea Scatchard is a Tax Partner at Deloitte, based in the Bay of Plenty. She can be contacted on ascatchard@deloitte.co.nz

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