Changes to use of money interest rules – what could it mean for you?

A significant number of changes have recently been made to the tax legislation, and these are aimed at making tax simpler for businesses. One important change was to how the “use of money interest” rules are applied to provisional taxpayers.

Under the previous rules, most provisional taxpayers had to pay their tax liability in 2 or 3 instalments, with interest charged (or credited) on any under (or over) payments. This meant that many taxpayers had to start estimating their year-end tax liability as early as four months into the financial year, and unexpected events could expose some taxpayers to an interest charge. Many taxpayers deliberately overpaid their first provisional tax instalment in order to avoid exposure to a future interest charge.

There was a ‘safe harbour’ rule which meant that interest was not usually charged when individuals had a tax liability less than $50,000, and when non-individuals had a tax liability of less than $2,500. However, filing an estimate automatically cancelled the ‘safe harbour’ status.

Under the new rules, this ‘safe harbour’ rule has been extended to $60,000, and will apply to both individuals and non-individuals. In other words, trusts and companies can now apply this rule. As before, filing an estimate will automatically cancel the ‘safe harbour’ status, and a new requirement is that all provisional tax instalments must be paid on time.

There is now a new rule which will lessen the interest exposure for many taxpayers who are not ‘safe harbour’ taxpayers. Under this rule, interest will only be calculated from the last instalment date, and by then most taxpayers will have a good idea of what their year’s tax liability will be. For taxpayers with a 31 March 2018 balance date, this means that interest will only be charged from 7 May 2018, not 28 August 2017, which could be very good news.

To qualify for this concession, all of the following statements must be true:

1. All but the last instalments were calculated using the standard method (the final instalment can be calculated using either the standard or estimation method), and
2. All instalments were paid on time, and
3. All “provisional tax associates” also calculated all but the last of their instalments using the standard method (the final instalment can be calculated using either the standard or estimation method) OR used the GST ratio method, and
4. There has been no “provisional tax interest avoidance arrangement”

The “provisional tax associate” rule is designed to stop associated taxpayers from switching income between themselves in order to avoid the application of the interest rules.

For advice or assistance with managing your provisional tax, please contact your local BDO adviser.