HELPING HAND TO PAY TAX

If you’ve read the previous article in Our Roar Newsletter, you know the level of scrutiny IRD brought to bear on taxpayers has increased substantially.  Succinctly this means taxpayers need to remain current satisfying their tax obligations.  To help clients meet their tax liabilities Tax Pooling is at hand.

Tax Pooling was established back in 2003 to help taxpayers meet their provisional tax obligations.  There are a number of tax intermediaries that operate in New Zealand.  Greenlion however uses Tax Traders which is an approved intermediatory, trusted by many accounting firms in New Zealand, which operates the tax pooling system.

Under the system, Tax Traders brings together taxpayers into one pool, permitting you to trade payments with other taxpayers to match your specific needs.  Clients obtain several benefits to using the system as noted below

BENEFITS TO TAX POOLING

• You pay money into the tax pool. You can make payments of any amount at any time of your choosing.  Your accountant will then ensure your deposited funds are moved to the correct taxes at the dates and in the amounts IRD expect to receive. This means there are no penalties nor use of money interest charged.

• If for whatever reason you need your money out of the pool, you can withdraw your deposits without Inland Revenue’s approval.

• If you haven’t made enough deposits into the pool to satisfy your tax liabilities, you can purchase another taxpayers unused/overpaid tax to settle your own obligations. Because the selling taxpayers tax was paid on time, IRD will input this to you and deem you to have paid your tax on time.  Whilst you will pay an up-front fee for this, you will minimize or avoid (depending upon the circumstances) late payment penalties and use of money IRD charge for missed tax payments.  Thus, despite the finance fee, you are usually significantly better off.

• You can delay paying your provisional tax by paying a low amount of interest up front and extending your due date for payment of provisional tax for up to 22 months.

• If you have paid too much into the tax pool, you can sell your tax at a premium (core tax plus interest).

• You can pay tax into the pool for a group of taxpayer.  For example, your company, trust and individuals.  At year end, when actual profits are determined and salaries are allocated to shareholders, funds can be transferred from the tax pool to different taxpayers, at the correct dates, to ensure there are no interest or penalties incurred.

Example 1 -  Financing Tax And Taking Up An Opportunity

Kerry is a property investor.  She has $80,000 cash in her bank account.  Kerry has the opportunity to purchase an investment property at a substantial market discount, but she would need to initially use the $80,000 as a deposit.  Kerry is faced with a dilemma as she also has a $60,000 provisional tax payment due.  If she purchases the property she won’t have enough money to satisfy her tax obligations.  A solution for Kerry is to pay a low amount of interest up front and extend the due date for paying her tax.  That way she will be able to purchase the investment property, and take up the opportunity to increase her wealth.  At the same time, she buys herself time to refinance and then pay her provisional tax.  Despite the interest she has to pay to Tax Traders, she financially advances her position by capitalizing on the opportunity to buy an investment property at a discount.

Example 2 - Financing Tax To Assist With Cash Flow

John and Judy run a whiskey distillery business and a café.  Winter months are hard for them but during the summer they make good profits by the café being exceedingly busy.  This year, extra equipment had to be purchased for the distillery business.  This has left John and Judy financially pressed.  They have already missed a provisional tax payment, consequently being charged late payment penalties and use of money interest.  They are confident they’ll be able to satisfy all their tax obligations in about 7 months, once summer can come and the café trading has begun.  John and Judy talk to their Accountant who arranges to buy them tax using Tax Traders.  This avoids further late payment penalties and use of money interest being charged by IRD.  During the summer months, the café is run off its feet and money starts to flow, permitting John and Judy to repay Tax Traders what they owe.

DISADVANTAGES

Undoubtedly, there are significant benefits to clients using the system.  But a couple of disadvantages come to mind.  For instance, whilst taxpayers can sell unused/overpaid amounts of tax and earn interest on the amounts sold, it maybe they could put that money to better use in their business.  Possibly other opportunities are afforded to them that would result in earning a higher return on their money.  Secondly, whilst a delaying effect can be achieved, eventually tax has to be paid.  Taxpayers can only kick the can down the road for so long.  There’s little point in paying interest charges to delay tax if you can’t ultimately pay the bill. 

SUMMARY

Like many things in life, Tax Pooling has two sides to it.  Accordingly, the circumstances a taxpayer finds themselves in must be considered before they avail themselves of the system.  A chat to your friendly Lion Accountant will help you in your decision-making process so be sure to roar before using this tool.