How businesses can take advantage of tax pooling in New Zealand.
Fluctuating revenues are a real pain for agencies when they try to forecast the amount of provisional tax they need to pay. Overpay and the IRD gives a pathetic 1.75 percent interest benefit. Underpay and they charge 8.4 percent interest on the tax bill with stiff late penalties on top. No agency wants to worry about this in the midst of a client pitch.
But tax pooling is a clever solution that helps taxpayers reduce the cost of interest and penalties on underpayments and increase the interest earned on overpayments. Tax pooling intermediaries offer options to both manage cashflow and reduce interest or penalties, even when IRD has already sent a statement.
While most people agree, there’s nothing more boring than tax - in New Zealand, at least, tax is actually quite creative.
Here’s how it works: As tax is date stamped, when a business has underpaid their tax or missed a payment, they can buy another business’s old tax – that is, tax that’s linked to previous years that wasn’t required.
They can even effectively delay their provisional tax payment. This means that when a tax payment is due, a company can transact using an online self-service option and arrange for their payment to be deferred. The cost of doing so – depending on who organises it – is about the same as using a floating mortgage facility to pay on time – but this option has no set up fees, credit applications or even ongoing commitment. If the business ends up not needing the tax, there is no penalty for not paying it on the new payment date.
The only way to do this is through an IRD accredited tax pooling intermediary. Accountants and tax agents should know about this. If they don’t, then they need to find out about it.
By paying through a tax pooling intermediary, businesses can reduce interest costs below the IRD rates, often up to 30%, and eliminate penalties. Tax pooling intermediaries match buyers and sellers of tax who have either paid too little or too much. For those who have a current year problem because they’ve underpaid their provisional tax, not paid at all, regularly overpay or find revenue difficult to estimate – tax pooling can help.
Once an agency is in the tax pool, there’s an array of products that it can use to optimise its tax position.
For agencies that come under a group, it’s even possible to swap tax from one agency to another. While conditions do apply, this is particularly handy for the holding company because profitability forecasts are based on the agency’s business and timing of agency deals.
Jek Tan is Tax Management NZ's head of digital, technology and operations. Previously GM of a leading marketing agency in Malaysia, Tan has led many high profile projects requiring secure transaction processing and user-friendly outputs