The new provisional tax rules are causing a few headaches for taxpayers and their advisers.
The majority of provisional taxpayers pay their tax in 3 instalments based on their last filed return – the so called ‘safe harbour’ option. Under new rules effective from 1 April 2017, if a taxpayer has not paid enough provisional tax at P1 (the first provisional tax date – 28 August for most March balance date taxpayers) they will drop out of the safe harbour and be exposed to use of money interest (‘UOMI’) from the first provisional tax date. Initially, these new rules didn’t cause too much trouble but the implementation of IRD’s new upgraded computer systems has seen some severe consequences imposed for even minor infractions.
The new system is very hard and fast with no exceptions and no tolerance for even small variations.
We have seen a client pay the amount on their tax notice without the cents. The shortfall of 50c was enough to take them out of safe harbour.
In another case, a refund was paid to the client’s bank account instead of being transferred to 2020 provisional tax, leaving the 1st instalment of provisional tax unpaid with the result that the client was tossed out of the safe harbour.
We have also seen cases where a client has paid the tax but has overlooked the payment and been a couple of days late. This minor oversight is enough to take them out of safe harbour.
This situation is bad enough but the new rules require that ‘all provisional tax associates’ have also used the standard safe harbour method for all their instalments (other than the final instalment) or have used the GST ratio method. If any of the provisional tax associates falls out of safe harbour they are likely to take any associated taxpayers with them. So dropping out of safe harbour may also have implications for any other associated entities.
Don’t Panic! There is a solution and that is to purchase tax from a tax pooling agent to fix the shortfall. We have done this for some very small amounts already (including that 50c purchase). This is annoying but necessary to prevent being charged interest and penalties and to prevent the wider issues arising from falling out of safe harbour.
There are a number of tax pooling agents operating in New Zealand, buying, selling and managing tax credits for clients. The tax pooling agents manage tax payments for their clients and they have surplus tax credits available to sell. These credits can be transferred to another taxpayer at the date originally paid. Purchasing the credits will put you back into safe harbour. While you do pay interest to the seller it means that the payment is credited back in time (at the due date) putting the taxpayer back into safe harbour and cancelling any late payment penalties.
There are some options for delaying the purchase if necessary for cashflow purposes and quotes can be obtained for the tax to be purchased with payment due at various dates. Interest is charged on the purchase but it is lower than IRD interest rates. However, more important in most cases is the ability to put the taxpayer back into the safe harbour regime.
If you are concerned about your tax payments or think you may have shortpaid or late-paid your tax contact your tax adviser for advice.