Tax pooling addresses one of the major challenges of provisional tax – having to pay on 15 January or right after the summer holidays (or any other time when IRD says so).
Paying on the dates set by the taxman can be problematic as these do not always align with when a business earns their income, nor do they recognize any cashflow issues they may be experiencing.
For example, we know 15 January can be tough going for some clients. Xero’s Small Business Insights Survey reveals only 39 percent of businesses are cashflow positive at this time of the year.
If someone does not pay on time, IRD charges interest (recently increased to 8.35 percent) and late payment penalties.
But tax pooling offers an IRD-approved solution to this by letting taxpayers make their provisional tax payments at a time or in a manner that suits them, without having to worry about those consequences.
Those due to pay a provisional tax installment on 15 January may find this a useful option if they want to manage their cashflow during the tricky post-Christmas/early New Year period.
How does tax pooling work?
A commercial tax pooling provider makes payments into its account at IRD on every provisional tax date on behalf of taxpayers wanting the option to pay an upcoming payment in installments or at a time that suits them.
Taxpayers entering an arrangement with a tax pooling provider then make their provisional tax payments at an agreed upon date in the future (or as and when it suits their cashflow if paying in installments).
When the tax pooling provider receives these payments, it allocates the tax the taxpayers needs to their required provisional tax date(s).
As the tax the tax pooling provider is transferring to a taxpayer’s IRD account has been paid and date stamped as at the original due date, IRD treats it as if the taxpayer paid their provisional tax on time when it processes this transfer. This, therefore, eliminates late payment penalties.
The taxpayer has some interest to pay the tax pooling provider, but this is lower than what IRD charges when tax has not been paid.
What tax types can tax pooling assist with?
Tax pooling can help with upcoming, missed or underpaid provisional and terminal tax payments for the current tax year or one just completed.
In situations where IRD issues a notice of reassessment, tax pooling can be used to reduce the interest cost and eliminate late payment penalties on historic income tax as well as other tax types such as GST, PAYE, RWT, NRWT and FBT.