Tax pools are valuable tools
In these uncertain economic times, managing a business’s income tax cashflows is even more critical to ensure that tax payments are both appropriate and not crippling in terms of quantum and timing. Tax can in itself be one of the largest expenditure lines for a business.
Tax on business profits is dealt with both prospectively and then retrospectively. The first stage is that businesses will generally pay current year Provisional Tax based on last year’s profit plus 5% (subject to an ability to vary such, albeit with some risk of penalty should they get it wrong) across three payment dates. After the end of the financial year, the tax return produces a total liability for the year which can result in a further payment (terminal tax) or a refund, depending on the relativity between provisional tax paid and the total tax liability for the year.
Notwithstanding what is paid, the IRD assumes that the payment of total current year tax should have been made in three equal instalments. If businesses underpay, or are late paying provisional tax (or have further tax reassessed following an audit or voluntary disclosure), they will be subject to interest at rates often well above their funding cost (currently 9.21%). If they overpay, they receive a low interest rate, and generally cannot access any refund until a tax return is filed. In terms of non-payment of amount due, there are also late payment penalties which accumulate on a punitive basis.
This business tax regime probably works best where business profits/cashflows and tax liabilities are predictable over time. But in the real world, especially in times of economic/business volatility or in industries that are seasonal/cyclic (e.g. dairy, horticulture), these tax payment requirements are inflexible, potentially disruptive in terms of managing operating cashflows, and often punitive in changing circumstances.
Sometimes when under cash pressure, businesses facing a lumpy tax bill (whether income tax or trust funds such as GST/PAYE) choose to bury their heads in the sand, and just not pay it. Such a decision is a slippery slope towards difficult interactions with the IRD, likely to result in penalties, interest and possible prosecution (in respect of the latter), and is not recommended in any form. For businesses in a stressed condition, dealing with your tax agent and IRD to agree payment strategies up-front is more likely to result in a palatable long-term outcome. Experience tells us the IRD are usually pragmatic is such circumstances.
For those business owners who manage their business proactively, monitor/plan cashflows and want to retain choice, there is another tool available to manage income tax called Tax Pooling, which provides flexibility in terms of timing and amount of tax paid, plus an ability to access tax already paid if circumstances change quickly, or to effectively “buy” older tax to save interest and penalty costs (in the case of underpayment in hindsight or reassessments from audits). Another benefit is the ability to pay tax at a “group” level and allocated such in hindsight much later. This is a much under-utilised strategy in my opinion.
For these reasons, Findex has established its own Tax Pool (in conjunction with Tax Management NZ) for its clients across NZ to provide this flexibility as a matter of course, plus some other exclusive benefits. This is to create a world where tax can be managed like any other major expense, spreading the costs, say, monthly, matching it with business cash-inflows where there is volatility, being able to access previous tax paid quickly, and being able to finance (on unsecured terms) lumpy tax payments that are due at the same time as other major expenditure (e.g. new plant). It puts the business owner in control.
If you would like further information or have any questions, please speak to your Findex adviser.