Not the time for tax – Key
Former Prime Minister John Key says imposing another tax on farmers now for greenhouse gas emissions won’t achieve much.
Inland Revenue (IRD) is not one for acknowledging the holiday season.
The department’s making many businesses pay an instalment of provisional tax on January 15 can be galling.
What’s more, as well as this falling due just after Christmas and new year, the repercussions of not making this payment on time are unseasonably harsh and can hit the pocket hard.
A couple of things can make this payment somewhat awkward and problematic for those with a provisional tax obligation due in January.
One is timing. As alluded to before, it must be paid when many people are off work enjoying a much-needed break and businesses are often cash-strapped.
The other is knowing how much to pay. For farmers and growers, this is made even more difficult because the rural sector is exposed to such volatility. Fluctuating commodity prices, the exchange rate and extreme weather can all have an adverse effect on income.
Most business owners will use the time in the lead-up to Christmas to look ahead and figure out what cashflow they will need to cover overheads during the holiday period.
Be sure to factor provisional tax into your budget if you are due to make a payment on January 15.
After all, unlike other creditors who may allow a bit of leeway if money is owed to them, IRD is not so forgiving. Fail to pay on time and it will charge usurious interest (8.27%) and late payment penalties.
The latter can quickly add up and lead to a spiral of despair given how they are applied:
- A 1% penalty is charged the day after payment was due.
- A further 4% if the amount of tax (including penalties) remains unpaid seven days after the original due date.
- An extra 1% incremental penalty every month the amount owing remains unpaid.
Now help is on the way. A bill currently before Parliament that contains several changes to the way income tax is paid will remove much of the angst for thousands of small- and medium-sized businesses. One problem, though: the measures will not be implemented until April 1 next year.
In the meantime, here are some things you can do now to mitigate risk in provisional tax.
First, review your year-to-date profit. Knowing exactly how your business is tracking financially means you can figure out if you are paying too much (or not enough) provisional tax for the year and make necessary adjustments.
If paying provisional tax on January 15 is going to be tough, or you simply wish to keep money in your business to tide you over until you start trading again, consider using an IRD-approved tax pooling intermediary to defer an upcoming provisional tax payment to a time that better suits your cashflow.
The finance fee paid to enter such an arrangement is lower than the interest IRD charges for underpaid or unpaid tax, and hefty late payment penalties do not acrue. No security or credit applications are required.
Intermediaries also allow you to pay provisional tax in instalments if that better suits your cashflow.
• Chris Cunniffe is the chief executive of Tax Management NZ.
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