Tax pooling is a way to finance your tax, it is becoming more commonly used through accounting practices to help clients manage cash flow and save clients’ money on penalties and interest that IRD would charge them. The interest rate charged by tax pooling intermediaries is lower than IRD’s rates and allows longer time frames for tax to be paid off.
Usually if you pay your provisional income tax payment 1 day late IRD will charge interest on this, whereas tax pooling intermediaries allow you to either pay the tax off or pay in one lump sum after the usual payment date and then they buy back dated tax for you.
There are several tax pooling solutions in NZ including TMNZ and PWC also has an intermediary company Tax pooling Solutions.
TMNZ is the one I most frequently use these days. They provide several options – Flexi tax and tax finance. Flexi taxi is the most common especially for smaller businesses as it allows you to setup the arrangement at any time and add to or edit it. If you couldn’t afford your 15th of January payment in full you could setup an arrangement for this and pay it off. All arrangements need to be completed within 72 days of the end of the financial year filing date. This means that your 15th of Jan 2021 payment would need to be fully paid by the 12 June 2022 (for those with extension of time) as this payment relates to the 2021 financial year, and with extension of time these returns are not due until 31 March 2022.
Tax is one of the largest expenses for any business so you want to get this right. Nobody wants to overpay tax as it is just money sitting at IRD that could be used elsewhere in your business. However you also don’t want to underpay tax as you risk IRD interest at approx. 7 percent and late payment penalties.
Tax pooling can help reduce exposure to interest from IRD by up to 30 percent and eliminate late payment penalties if you have missed a payment or underpaid your payments during the year. It also gives you a safety net if you cannot accurately forecast your tax which can be incredible important at this time when some businesses are still impacted by Covid-19 and the Christmas and New Year period can often be a challenging time.
You can finance your provisional tax payment (Tax Finance). This means you pay a fixed interest cost upfront and then the core tax amount at an agreed date in the future.
Alternatively, you can enter an instalment arrangement (Flexi Tax). Under this payment plan, interest is recalculated on the core tax amount owing at the end of each month. The arrangement offers flexibility as you can pay as and when it suits your cashflow.
All tax pooling arrangements eliminate late payment penalties. The interest payable is significantly cheaper than the seven percent IRD charges if you fail to pay on time.
Using TMNZ effectively wipes all the IRD interest and penalties that you may have incurred due to late paid tax and you pay them at a lower interest rate at a time that suits you, as long as payments are made before the final deadline. This helps you manage your cash flow better and save money on Interest and Penalties.
Arrangements can be setup anytime during the year as your provisional payments become due or once your accounts have been completed for the year and you know exactly how much tax needs to be purchased at what dates. Tax pooling can only be used for certain taxes mostly income tax. You are able to set an arrangement up directly with TMNZ or your accountant will be able to do this.