PONSONBY PROFESSIONALS

PONSONBY PROFESSIONALS LOGAN GRANGER: RECENT CHANGES TO IRD RULES AROUND INTEREST APPLICABLE TO LATE PAYMENT OF PROVISIONAL TAX

Before reading further, note that the below changes relate only to tax payers with annual residual income tax of less than $60,000 (also known as the safe harbour threshold).

The first instalment of provisional tax for the March 2023 income year was due on 28th August 2022 and for those tax payers with 6 monthly GST filing, the first one is due on 28th October 2022. Now, as most people know, if provisional tax is not paid on time, late payment penalties and use of money interest will apply. On the face of it, there’s a lot of incentive to make sure your payment is made on time, whether you pay direct to IRD or backdate payments through a tax intermediary service.

There’s been consistent tweaking of the use of money interest rules over the past few years with the intention of simplifying the tax rules for small to medium enterprises.

The last changes in 2017 were designed so that if taxpayers made the payments they were required to make, use of money interest would not apply until terminal tax date, which for most taxpayers is either the 7th February or 7th April (extension of time approved as on a tax agents listing) following the end of the tax year in question.

The requirement to make the payment in full and on time, was problematic as taxpayers sometimes missed their payments by one or two days and/or short paid, which meant that interest and penalties were automatically applied from the date of the provisional tax payment as opposed to the terminal tax date. What has emerged subsequent to the 2017 law change is that the number of taxpayers who unintentionally paid short or late was either not fully considered or underestimated by Inland Revenue. Consequently, a large number of taxpayers have had to pay use of money interest and late payment penalties.

On review Inland Revenue has determined that “in these circumstances, the application of use of money, interest and late payment penalties is not proportionate to the offence committed.” It considers that it is “appropriate” to allow taxpayers to retain the safe harbour concession for use of money interest regardless of a missed or short payment. To reflect this determination the interest rules have been changed with effect from the start of the current tax year.

Logan Granger

What the change means is you won’t suffer use of any interest if you miss a payment or there’s a short fall on your tax payment. You won’t be charged interest of 7.96% on the underpaid tax until your terminal tax payment date (7th Feb/7th April). However, late payment penalties will still apply. These are 1% of the underpayment immediately and a further 4% if the tax has still not been seven days later for a maximum 5% penalty. (Inland Revenue has now also done away with the monthly 1% late payment penalty on top of the initial penalties).

We caution those taxpayers of considering arbitraging the system to avoid paying tax to IRD until the terminal tax date, as although no interest will apply, up to a 5% penalty will remain in force. As the taxes due won’t technically be paid up to date and on time, it potentially negates any ability to argue you have acted in good faith by meeting your tax liabilities in a timely manner and could place you in a disadvantaged position on any future negotiations of instalment or disclosure arrangements with the IRD. Keeping payment deadlines with IRD instils good cash flow management and removes the temptation of spending the cash that should be kept aside for taxation commitments. (LOGAN GRANGER)  PN

Disclaimer – While all care has been taken, Johnston Associates Chartered Accountants Ltd and its staff accept no liability for the content of this article; always see your professional advisor before taking any action that you are unsure about.

JOHNSTON ASSOCIATES, 14 St Marys Bay Road, T: 09 361 6701, www.jacal.co.nz

14 St Marys Bay Road, St Marys Bay