BDO Eyes on Tax: New ways to use Tax Pooling to get on top of historic tax debt
BDO Eyes on Tax: New ways to use Tax Pooling to get on top of historic tax debt
The recent extension of tax pooling to deal with historic tax debt relating to the 2023 or 2024 tax years, not only highlights the growing problem of historic tax debt but also represents a practical approach, which will likely be welcomed by those taxpayers who can benefit from this extension.
Inland Revenue have advised that small and medium-sized businesses accounted for 61% of all tax debt as at June 2025. With around 97% of New Zealand businesses classed as SMEs or micro-businesses, this highlights how widespread tax debt pressures can be across the economy.
Inland Revenue’s focus on debt collection is also increasing. In the last year, it collected $4.3 billion of overdue tax – $252 million more than the previous year. Budget 2025 included an additional $35 million per year to support continued compliance and collection activity, and revenue collection is likely to remain in focus in the lead-up to Budget 2026 and the General Election.
“Often the amount of debt owed to Inland Revenue is made up of the core tax owed, but also use of money interest and late payment penalties, which can accumulate at an eyewatering rate – often resulting in a burgeoning tax debt, which can be overwhelming for SMEs and their owners.” – Iain Craig, BDO National Tax Leader
In 2003, New Zealand introduced Tax Pooling to provide a solution for taxpayers to reduce the cost of use of money interest and late payment penalties on overdue tax, while offering a better rate of interest than the rate offered by Inland Revenue on tax refunds.
Naturally, there were specific timeframes within which tax pooling operated which meant that prior to the recent change, the ability to use tax pooling for the 2023 and 2024 tax years had expired.
“Tax pooling is a highly innovative and brilliant solution unique to New Zealand. It has proved to be an invaluable release valve for many taxpayers who, for whatever reason, were not able to pay their provisional tax or terminal tax on the date it fell due.” – Sandita Singh, BDO Associate Director, Tax
What is tax pooling?
In simple terms, a taxpayer who is due a tax refund can be pooled with a taxpayer who owes some tax at a better interest rate for both parties, than the headline use of money interest rates charged or offered by Inland Revenue.Tax pooling allows businesses to pay their provisional tax into an intermediary’s account and then when your actual profit is confirmed, the correct amount of tax is transferred directly to Inland Revenue. If they have a refund within the pool, it can be sold to a taxpayer who owes the same amount of tax. The tax pool allows the tax to be offset against the indebted taxpayer at the time the tax was paid into the pool resulting in significant savings in interest and penalties.
It allows you to:
- Pay tax early if you have surplus cash
- Delay payment if cash flow is tight
- Square things up later without penalties
- Take advantage of lower interest rates
- Have any overpayments easily refunded before the tax return is filed
Essentially, it’s a tool to help businesses like yours manage risk, cash flow and costs. To find out more about whether this might be a good idea for your business, consider reaching out to your local BDO Adviser.
Extension to the 2023 and 2024 income tax years
Inland Revenue has introduced a new debt-recovery pilot to allow eligible customers with historic income tax debt for 2023 and 2024 tax years to use tax pooling.For small and medium-sized businesses, this could make repaying your overdue debt feel less daunting and more achievable. Even if you already have an instalment arrangement in place with Inland Revenue for income tax debt from 2023 or 2024, you can still join the programme if it feels like it’s the right move for you.
To take part, customers must have a contract with a tax pooling intermediary that
- is entered into on or before 1 October 2026, and;
- settles the outstanding debt by 1 October 2027
“A key benefit of using tax pooling to repay historic income debt for the 2023 and 2024 tax years would be to avoid or reduce penalties and take advantage of lower interest rates.” – Rozelle van Schaik, BDO Associate Director, Tax
How can tax pooling benefit my business?
Estimating provisional tax can be difficult if your business has fluctuating income, seasonal cash flow, an unexpected growth or downturn, or a significant one-off transaction. Where you underpay, use-of-money interest (and potentially penalties) can apply.
Tax pooling could help by:
- Smoothing cash flow – pay earlier when you have surplus cash, or delay payment when cash is tight (within the rules of the pool)
- Reducing interest exposure – in some cases, pooled funds can be applied to Inland Revenue as if paid by the relevant due date (subject to tax pooling rules)
- Managing uncertainty – adjust your position once your final results are known, rather than relying solely on estimates
- Providing flexibility – top up shortfalls or reallocate payments across dates/tax types as your circumstances change (subject to provider and Inland Revenue requirements)
- Potentially reducing penalties risk – where rules are met, pooling may help avoid or reduce late payment penalties compared with paying after the due date
- Avoiding “overpayment lock-up” – depending on the intermediary’s terms, refunds or reallocation may be available if you’ve overpaid
It is a misconception that tax pooling is only for businesses under financial pressure. It is a tool that can be used strategically to ensure you’re paying the right tax at the right time.
