Do you find it difficult to plan for “tax time”? Is it an arduous task trying to work out how much tax you should be paying and when? Or do you find it frustrating when you have to wait until the end of the financial year to ascertain your tax position then the IRD take weeks to refund any overpayment of tax, but only days to charge you penalties and interest on any underpayment?
Tax intermediaries have many years of industry experience and are offering a great initiative to assist taxpayers. They are gaining recognition for making tax time just that little bit easier by providing you and your business with greater flexibility for making tax payments.
What is a Tax Intermediary?
A tax intermediary works somewhat like a bank whereby sellers who have overpaid their taxes are matched up with buyers (like a bank would match up savers and borrowers) who have underpaid their taxes. The intemediary has to have the IRD’s approval to establish and maintain a tax pooling account. Funds are held by an independent Trustee (i.e., Public Trust or similar) to hold, maintain and operate the tax pooling account on behalf of the tax intermediary.
Tax Pooling Deposits:
Rather than making payments directly to the IRD, payment are made to the tax intemediary and held in a tax pooling account until instruction is given to transfer the funds to the IRD. Payments are made by the normal due dates, or they can be made throughout the year when it suits you. There is no minimum deposit amount. When the actual tax position of the entity is known, tax pooling deposits allow:
- Overpayments to be sold (with a credit for interest earned); or
- Overpayments to be refunded in a timely manner without having to wait for the Tax Return to be assesed by the IRD
- Short payments at any instalment date can be covered by purchasing back dated tax credits, reducing interest charges and eliminating exposure to late payment penalties.
If a tax payment has been missed, or short-paid (business trading better than expected is always a good thing), a tax intermediary allows entities to purchase back dated tax credits that are transferred to the IRD as if they had been paid on the original due date. While there are administration costs associated with the establishment of the arrangement and an interest charge, the tax intermediary’s interest rates are more competitive than the IRD’s Use of Money (UOMI) rates. The biggest saving is the elimination of late payment penalties that would otherwise have been charged by the IRD.
Tax purchases are available for other tax types (i.e., GST and PAYE), but only in the event that there has been a reassessment due to an IRD audit, or a voluntary disclosure.
Tax finance is also a good option that provides flexibility in making tax payments in situations where cash flow may be tight, or where cash would be better utilised in the business.
When you finance tax, a tax pooling intermediary borrows the amount of tax you want to finance from a third party and deposits this in the tax pool.
Typically the interest is paid upfront and the principal is paid in one lump sum at a future date as agreed with the tax intemediary. Instalment arrangements are also able to be established, so that the principal (core tax) amount is paid over several months.
Because all of the interest is paid upfront and the terms of the arrangement set, there is nothing further to pay prior to the maturity date of the finance arrangement. Applications can be completed online in minutes, without the need for financial disclosures and with guaranteed acceptance.
With tax finance you have the right, but not the oblication, to pay for the tax at maturity. If you no longer need the tax, or you are unable to make payment, there is nothing further to pay. If you notify the tax intermediary prior to maturity they will provide a refund for the unused portion of the finance cost.
The term for a financing arrangement is usually 3-12 months, but can be extended at maturity in certain cases.
The interest rate for tax finance is based on the bank bill rate as opposed to the IRD’s UOMI rates, which often means that the rate is less than your bank’s overdraft rate.
Would you like to know more?
YRW has recently been described as one of the most progressive accountancy firms for utilising tax pooling options for paying income tax. This means we are well placed to determine a tax pooling strategy best suited to each client. We have developed strong relationships with tax pooling intermediaries and regularly review the options available for our clients.
If you think tax pooling could be an option for you, or if you would like to know more, please click here for the contact details of Steve, Eric, Raimarie and Natalie and our accounting team.