Managing historic income tax arrears: how tax pooling can reduce penalties and interest

By Amy Sexton, Robyn Walker & Josh Taylor

Given the continued increase in outstanding tax debt, and the focus on debt collection by both Inland Revenue and the Government, it is unsurprising that recovery initiatives remain firmly in the spotlight. Against that backdrop, Inland Revenue announced in late March 2026 a debt-recovery pilot programme that will allow eligible taxpayers with income tax debt for specified tax years to use tax pooling to repay that debt.

Firstly, what is tax pooling?

Tax pooling is a unique feature of the New Zealand tax system designed to help manage cashflow and income tax obligations when the amount and/or timing of income tax may be uncertain. Broadly, taxpayers deposit funds into a shared “pool” administered by an Inland Revenue-approved intermediary. One of the key benefits is that, where tax is ultimately due, taxpayers may be able to reduce or eliminate use of money interest (UOMI), late payment penalties and, in some cases, shortfall penalties. Our May 2022 and February 2025 Tax Alert articles provide further background on how tax pooling works and when it may be useful.

How can this help with tax debt?

Historically, tax pooling has not generally been available to repay existing tax debt. During the COVID-19 pandemic, however, Inland Revenue temporarily extended the regime to assist taxpayers with income tax arrears, enabling them to retrospectively purchase tax through a tax pool. In practical terms, this could replace Inland Revenue’s higher UOMI and late payment penalties with the lower tax pooling interest rate, while still requiring the underlying core tax to be paid. In other words, the measure supported liquidity, but it did not write off or forgive debt. That extension was time-limited and targeted at COVID-19 related arrears.

The introduction of the March 2026 pilot suggests Inland Revenue considers that temporary measure delivered worthwhile outcomes, and is now testing whether similar relief can support the collection of other income tax debt.

How does the pilot scheme work?

Income tax debt from the 2022/23 and 2023/24 tax years will be able to be paid using tax pooling until 1 October 2027.

Under tax pooling, if, for example, a taxpayer had provisional tax debt from 28 August 2022, they can purchase tax from a tax pooling intermediary as at that date (assuming the tax pool has existing pre-paid tax to sell at that date). This effectively deems the payment to be made to Inland Revenue on time, meaning there is no initial late payment penalty, and no 1% monthly incremental late payment penalty, and no UOMI (at between 7.96% - 10.91% p.a.). Taxpayers have to pay interest to the pooling intermediary, but the rate will likely be significantly less than 7.96% - 10.91%.

Who can use it?

The new proposed section RP 17C applies to someone who:

• Asks a tax pooling intermediary to help on or before 1 October 2026, noting they do not need to fully complete the contract until 1 October 2027
• Asks for help with provisional tax, terminal tax, or interest thereon for the 2022/23 or 2023/24 income year
• On the date the contract is entered into, the person is not:
  o bankrupt/liquidated and has not committed an act of bankruptcy
  o unable to pay their debts under the Companies Act
  o subject to legal proceedings for unpaid tax
  
• All income tax, GST and PAYE returns are up to date
• All GST and PAYE amounts have been paid
  

There is some discretion to waive criteria if financial relief has been granted.

Is this good?

We asked Josh Taylor – co-founder of New Zealand’s leading tax pooling provider, Tax Traders – to explain the significance of Inland Revenue’s debt-recovery pilot programme for taxpayers.

This pilot marks the first time tax pooling has been explicitly enabled at scale to help Inland Revenue address historic income tax debt.

Currently, income tax for historic tax periods can only be settled with Tax Traders in certain reassessment or voluntary disclosure situations.

Inland Revenue data shows there is $1.2 billion in income tax debt across these two tax periods. By allowing eligible taxpayers to use tax pooling, the pilot provides a legislated and structured pathway to resolve older income tax liabilities, while reducing the ongoing impact of interest and penalties.

For taxpayers who qualify, this creates greater certainty and affordability in terms of cost savings, while ensuring the underlying tax is paid in full in a manner that suits taxpayers’ business cashflow.

Tax Traders acknowledges the work of Inland Revenue policy officials and members of the Finance and Expenditure Select Committee in recognising the role tax pooling can play in supporting effective debt recovery outcomes.

Further information

If you’d like to learn more about Inland Revenue’s debt-recovery pilot programme, Tax Traders recently ran a webinar that dives further into the legislative amendment, eligibility criteria and deadlines. You can watch the webinar here.