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Tax pooling might be worth a thought

Author: Pippa Watson

In the current economic environment a greater number of companies are finding it more and more difficult to forecast their provisional tax obligations and accurate forecasting is becoming more important as cash flow issues arise. To provide greater flexibility, and to reduce your Inland Revenue (IR) interest costs, tax pooling might be worth a thought.

Tax pooling is used by thousands of New Zealand companies to help manage their provisional tax needs; however there are still many people have not heard of tax pooling or do not understand how it works.

For those who have not yet utilised tax pooling, we summarise below some of the benefits of tax pooling and what it can do for your business in reducing the stress of meeting your provisional tax obligations, as well as for dealing with increased liabilities resulting from tax audits and voluntary disclosures.

To give you some background, tax pooling is a government approved scheme whereby ‘approved intermediaries’ operate tax pooling accounts with IR. Instead of making payments directly to their account at IR, taxpayers can deposit their funds into a tax pooling trust account at IR held by trustees. IR approved intermediaries are then able to offset under and overpayments to increase the return on overpayments and reduce Use of Money Interest (UOMI) exposure on underpayments for those taxpayers in the pool. It essentially allows a business to offset any underpayments of provisional tax made with any overpayments within the pool and most importantly, at a more favourable interest rate than IR UOMI rates. Further, tax pooling can assist businesses that are not yet members of the pool, by allowing them to buy tax credits where a company or individual has missed their provisional tax or terminal tax due date; for audit settlements or a voluntary disclosures. Tax credits for other tax types, such as GST, can also be purchased from tax pooling intermediaries, however, certain conditions apply.

“We regularly hear from clients who have underpaid 2012 tax, believing it was going to be another hard year. They now have additional provisional tax and interest to pay” says Chris Cunniffe, CEO of Tax Management NZ. “We are generally able to reduce their IR UOMI cost by up to 30%”.

Tax pooling intermediaries provide various services; the main services include pooling, purchasing and financing. The below examples demonstrate each of these.

Pooling

Growing Fast Limited (GFL) has overpaid its provisional tax by $50,000 at each of its first and second provisional tax dates. This overpayment, based on the IR rate (1.75%), would return only $1,150 of interest 6 months later. If GFL had paid its provisional tax into a tax pool instead of directly to the IR, the tax intermediary may be able to offset this with another taxpayer’s underpayment and return approximately $2,900 (of say 4.4%) of interest to GFL (an increase of approximately 50%).

Purchasing

Summer Seasons Limited (SSL) identifies 6 months late that it has underpaid its third instalment of provisional tax by $50,000. This underpayment, based on the IR rate (8.40%), would leave SSL with $2,120 of interest to pay as well as late payment penalties, because it did not meet its uplift liabilities. If SSL approaches a tax pooling intermediary to purchase this tax based on an intermediary’s rate (of say 6.3%), it would have $1,580 of interest to pay and zero late payment penalties.

Financing

Slow Winter Limited (SWL) is coming up to its second provisional tax payment date however it has been experiencing a decrease in business in recent months and is unable to make its next provisional tax payment of $50,000 until 3 months later. Based on the IR rate (8.40%), paying this payment 3 months later would leave SWL with $1,050 of interest to pay as well as late payment penalties, because it did not meet its uplift liabilities. However, since SWL knows what its liability is going to be on its provisional tax date, SWL could approach a tax pooling intermediary to finance this payment on its due date. By financing the payment SWL would be able to purchase tax paid at the due date but in 3 months’ time when it has sufficient cash flow. The cost of financing this transaction would be $840 which is calculated at the intermediary’s rate (say 7.0%) for 3 months. This payment would be required to be paid on the date of entering into the finance arrangement.

“Clients really appreciate the ability to defer the payment of their tax to match their business’s cash flow, rather than having to pay on the provisional tax dates stipulated by Inland Revenue” says Chris Cunniffe. “Tax Financing is the fastest growing part of the tax pooling industry”.

When considering the use of tax pooling it is a good idea to shop around the various intermediaries to ensure the most favourable interest rates are received.

Tax intermediaries are easy to deal with and can be approached directly however, Deloitte is happy to help out with any tax pooling queries you may have. For more guidance, please contact your Deloitte advisor.


Tax Alert March 2013 contents

 

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