It’s been said there are two things certain in life, death and taxes. As most business owners want to be profitable, inevitably tax needs to be paid. If cash flow is not well managed, this can put a strain on businesses when tax payments are due. One such example is early-stage businesses that get caught out enjoying profits and cash in their first year of operation and not planning for year two when tax from year one is due, along with provisional tax for year two.

In recent times businesses have had to deal with the cashflow uncertainties created by the global pandemic, and now increasing interest rates combined with high inflation.

However, the tax system does not generally adjust for such uncertainties and the most used method for determining tax payments is the uplift method. This assumes that business owners will earn 5% more than the prior year (or 10% more than two years ago).

There are other methods available, such as estimation, accounting income, or the ratio option. These methods have their own challenges and are often inaccurate or involve considerable adjustments, and in the case of the estimation method, can result in penalties. Because of this, most taxpayers elect the uplift method.

While the tax system calculates, and the IRD system assesses tax based on this uplift, should the tax due be lower, the provisional tax assessment will reduce and so then will the potential exposure to interest.

This begs the question; how can business owners accurately manage cash flow and pay sufficient tax when they are dealing with many unknowns?

Tax pooling – what is it?

Back in 2003, legislation was introduced to allow for tax pooling. Tax pooling creates flexibility for taxpayers around their tax payments and enables them to better manage their cash flow. Findex is aligned with Tax Management New Zealand (TMNZ) which was the first tax pooling provider in NZ.

Tax pooling allows businesses the ability to pay their tax when they want (within certain timeframes) and ensures that the IRD receives the tax on the correct date. While there is an interest charge for doing this, the interest rates are less than those charged by the IRD, and late payment penalties can be avoided.

Further, if a business has paid tax and discovers that the payment made was too high, the funds can be refunded to the taxpayer without the requirement to wait until after year-end and file the relevant tax return to justify the reduction. Also, if a business has a short-term need to finance, tax paid can be borrowed against as unsecured borrowings for short periods of time.

For groups, paying through tax pooling allows the group to make one payment and allocate these funds within the group once the overall tax position is known.

For those concerned about the tax being with an external provider, the funds are paid into a trust account which is held at the IRD. This is tagged as pooling payments, and an independent trustee holds the details of which taxpayer these funds relate to. The funds are always available to taxpayers and can be easily moved between tax pools or allocated to a taxpayer’s IRD account at any time.

What next?

At the end of the day, the question is not whether a taxpayer should think about using tax pooling, the better question is why wouldn’t they use it? In the worst-case scenario, funds can be directly allocated to your IRD account the same as if they had been paid directly to the IRD.

Check out our webinar on provisional tax rules and tax pooling to find out more.

Disclaimer:

The views and opinions expressed in this article are those of the author/s and do not necessarily reflect the thought or position of Findex.

This document contains general information and is also not intended to constitute legal or taxation advice. If you need legal or taxation advice, we recommend you speak to a qualified adviser.

November 2023