Provisional tax has long been difficult to get right and expensive to get wrong.
Let me explain.
On April 7, Inland Revenue (IRD) expects terminal tax to be paid by those who did not pay enough provisional tax for the 2016 year. It’s the downside of having a better-than-expected financial year, especially as IRD may charge steep interest of 8.27% on the underpaid amount. This is because the current provisional tax rules assume you keep a crystal ball in the top desk drawer and could correctly forecast your income tax liability ahead of time.
Getting payments right is a difficult task, but even more so for those who operate in rural climes. There’s volatility in commodity prices, the exchange rate and unexpected weather events that can impact earnings.
After the impact of paying terminal tax, many businesses will pay their third and final instalment of provisional tax for the 2017 tax year on May 7.
While tax should always be budgeted for, we do not live in a perfect world and these payments can be akin to taking a one-two punch to the ribs in the way they can impact cashflow.
The knockout blow, however, comes if you do not pay on time: IRD charges interest and late payment penalties. Both add up very quickly.
So, with that in mind, what is my advice for those who find themselves with tax due on April 7 and May 7? Pay the terminal tax first. It has the greatest exposure to IRD interest so should be cleared immediately.
You can reduce any interest cost (and eliminate late payment penalties) if you choose to settle what you owe through an IRD-approved tax pooling intermediary. An intermediary can apply surplus tax paid to IRD on the original date it was due against your liability. IRD will treat this as though you paid your provisional tax on time and will cancel interest and late payment penalties. Settling your terminal tax through a tax pooling intermediary gives you an extra 75 days past your terminal tax date to pay.
In regards to the provisional tax due on May 7, there are a couple of things you can do to ease the burden on your cashflow.
Start by reviewing your financial year. Given this instalment is due after the 2017 tax year has ended, you should have a rough idea whether you have paid too much or too little provisional tax and adjust your payment accordingly.
You should consider using tax pooling to defer the May 7 provisional tax payment to a date in the future that better suits you if cashflow is tight or you have a better use for the money.
The upfront finance fee to enter such an arrangement is much lower than most other traditional forms of finance. Approval is guaranteed and the fee tax deductible.
You can also choose how long you would like to defer the payment of tax (up to 12 months).
Be sure to seek the advice of your accountant if you have any questions about these looming income tax payments. With a bit of planning now, you can be empowered to do tax on your terms as opposed to feeling like the meat in the tax sandwich.
• Chris Cunniffe is the chief executive of Tax Management NZ and former head of the BNZ and Air New Zealand tax teams.