Meeting your tax obligation without penalty

An increasing number of businesses are utilising ‘tax-pooling’ to meet their IRD obligations and protect cashflow.

When it comes to one of the most disturbing stress-points in running a small business – or any enterprise, for that matter – owing money to Inland Revenue (IRD) is right up there with your major client defaulting on bills, your bookkeeper absconding, or the sheriff nailing the front door!

Dealing with an inquiry from the IRD even when you know you are up to date with any necessary payments racks you with a lingering shudder for the duration. Mention in general conversation that the IRD is showing an interest in the affairs of your business, and watch your mates take a step away.

Thousands, if not tens of thousands, of business owners face that moment of truth annually at this time of year, between 7 April and 7 May. Be it an upcoming provisional tax payment or an outstanding income tax liability, it is an obligation which can put a strain on cashflow and pose serious questions as to how you might settle the liability on the due date.

And, of course, penalties and interest charges haven’t even been mentioned yet. (Reminder: the taxman charges business late payment penalties of up to 20 percent per annum and interest of 9.21 percent if the business does not pay or underpays.)

“It’s a question one can ill afford to leave unanswered,” says Chris Cunniffe, CEO of Tax Management NZ (TMNZ), one of the more innovative financial service providers in the country. The ‘tax-pooling intermediary’, which has helped more than 25,000 companies save $70 million in IRD compliance costs since opening for business in 2003 – provides an IRD-approved way for businesses to manage cashflow, by letting them make income tax payments in flexible instalments.

“Our goal is to create a better tax environment for New Zealand business. Providing the flexibility to pay provisional and terminal tax in instalments is one way we are doing that.”

The company boasts an advisory board made up of Sir Ralph Norris, David McLay and Rob McLeod, with a board consisting of independent directors Peter Schuyt (chairman) and Victoria Carter, plus Ian Kuperus, the creative TMNZ founder.

TMNZ, which is registered with IRD and operates under legislation set out in the Income Tax Act 2007 and Tax Administration Act 1994, enables a business to pay off provisional or terminal tax via instalments for the current tax year or the one just completed.

“Flexibility is the key word in our service offering. Not only can a business chip away at its provisional or terminal tax liability, by paying whatever they can afford, but they can also choose when they make those payments.

“For instance, let’s say a business owes $15,000. They could pay $1,000 in the first month, nothing the following two months, $4,000 the next and then the remainder of tax owed after that,” says Cunniffe, who led the tax teams at Air New Zealand and Bank of New Zealand (BNZ) for 15 years, during a time of volatility for both companies, before joining TMNZ.

“This essentially does two things: it allows a business to match its income tax payments to its cashflow cycle and gives them the flexibility to settle what they owe the IRD by paying what they can, when they can.”

Eliminate penalties
By paying income tax through TMNZ, a company eliminates IRD late payment penalties. Importantly, a business also pays interest at a rate much lower than IRD’s underpayment rate.

“The IRD allows the use of tax pooling so a business can mitigate its exposure to IRD interest in the event it has missed or did not pay enough income tax at the time. A business has peace of mind as its payments are held at TMNZ’s tax pool account at IRD. This account and the bank account into which payments are made are overseen by an independent trustee, Guardian Trust.

“Payments can be as low as $250. A business has until 75 days after its terminal tax date to pay off what it owes.”

Cunniffe notes the company, which has provided instalment-type payments on a request basis since 2008, made the decision last year to offer that service to all clients, by investing in systems to allow ‘scalability’. This followed them noticing support for something similar in the wider tax community.

A discussion document issued last year by the government, proposing the idea of businesses paying their income tax on a PAYE basis, similar to individual taxpayers was publicly backed by the Labour Party, New Zealand First and the Green Party. Eighty percent of members from the Employers and Manufactures Association surveyed as part of a tax payment survey supported the idea of a system where they could spread income tax payments across 12 months.

“We remain committed to working alongside IRD as part of ‘Business Transformation’,” Cunniffe says. “To the extent our tax system remains imperfect, we want to ensure tax pooling can help take away some of the rough edges.”