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Inland Revenue: friend or foe?

Tax Alert - September 2023

By Andrea Scatchard & Samuel Eddy

Over the past few years, businesses all around New Zealand have been under pressure and feeling the economic pain. Despite tropical cyclones, New Zealand’s economy entering a recession, and constant official cash rate increases, the Inland Revenue will keep knocking. This year there has been an increase in the number of companies being placed into liquidation, including some high-profile businesses in the construction industry. Not all of these liquidations will be at the instigation of Inland Revenue, but a significant number will be as the Inland Revenue is often a significant creditor in insolvencies. Inland Revenue takes a particularly dim view, and so they should, of taxpayers who don’t meet their tax obligations on time.

Even when times are tough, it is important to keep your tax affairs in order as the cost of use of money interest, late payment and late filing penalties can add up quickly. So, what can you do to stay in Inland Revenue’s good books?

Keep on top of filing your returns

During challenging times it may be tempting to delay filing returns, particularly if cash flow is tight. However, it is essential to meet filing deadlines to avoid late filing penalties being applied. Keeping the discipline of filing returns is essential if you want to Inland Revenue to look favourably on an instalment request.

Set up instalment arrangements.

All taxpayers are required to pay their taxes in full and on time. Unpaid tax returns can quickly spiral into significant accumulated debt, particularly when penalties and interest start to be applied. If your business is unable to meet any of your tax payments on time, you may be able to apply for an instalment arrangement to pay the debt off over time. It is important to talk about this as an option with Inland Revenue early before your payments fall due. Essentially you will need to agree on an instalment amount, and payment start and end dates. Inland Revenue may ask for some financial information to support the application that tax payments can’t be made. The overriding condition is that you will need to agree to pay the tax as quickly as is reasonably possible. In other words, this is not a holiday or deferral from paying taxes. A 1% penalty (instead of potentially 5%) will still be applied upfront, but the Commissioner has the discretion to remit penalties and interest down the track if the business complies with the arrangement and the core tax debt is paid.

Make sure you avoid UOMI

Use of money interest (UOMI) is paid by either the Commissioner (when tax is overpaid) or by the taxpayer (when tax is underpaid) and applies to most taxes. The current rate charged by the Commissioner on underpayments is 10.91% and the rate paid on overpayments is 4.67%. The high interest rate charged gives an incentive to taxpayers to encourage payments to be made on time and not use the taxes due as a source of business finance. Our February 2023 article has more information about UOMI.

Provisional tax payments and tax pooling

Provisional tax payments are primarily paid based on an uplift from a taxpayer's most recently filed income tax return. If you are forecasting that your results for the 2024 year will be worse than 2022 or 2023, then paying provisional tax based on the uplift method may not be best from a cash flow perspective. While you can estimate your current year's liability and pay a lower amount based on that estimate, we don’t usually recommend this as it exposes you to possible penalties if that estimate turns out to not be fair and reasonable when compared to the final tax liability when the actual tax return is prepared.

Often a better option is to make use of tax pooling. Tax pooling intermediaries operate tax pooling accounts with Inland Revenue, allowing taxpayers to deposit income tax payments into their tax pooling trust accounts that are then transferred to Inland Revenue once the tax returns have been filed and the final tax liability is known. Tax pooling is particularly useful when there are decreasing profits or missed payments. It can also allow taxpayers to postpone tax payments (at a competitive interest rate) to free up working capital or better match your cash flow if you have a seasonal business.

In tough times, tax obligations can cause extra strain on business cash flow and liquidity. It is important to make sure you keep communicating open communication with your tax advisor and Inland Revenue to try to avoid penalties, interest and potential insolvency. To make the best use of the options available, if you have any questions or would like help navigating the options available to you, please seek advice from your usual Deloitte advisor.

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