To help taxpayers understand their upcoming tax obligations, we have compiled a list of commonly asked questions and answers to help you navigate through this difficult time.
GST and terminal tax payments due soon
Q: I have a GST payment upcoming, what if I don’t have sufficient cash to make this payment?
A: If businesses are unable to pay taxes on time due to the impact of COVID-19, Inland Revenue notes that it is not necessary to contact Inland Revenue immediately. Rather, Inland Revenue suggests you get in touch when you can to apply for an instalment arrangement and to discuss remission of interest and penalties (we don’t suggest delaying this too long). An instalment arrangement is an agreement with Inland Revenue to spread out payments of tax over time. As mentioned below, if this financial relief is sought prior to the due date of tax, only a 1% initial late payment penalty is applied. Despite potential difficulties in making tax payments, Inland Revenue still expects businesses to continue to file returns on time as this information is required to make correct payments to people and to help the Government continue respond to what is happening in the economy. Filing a return, even if you cannot pay, will ensure you do not get issued with a default assessment.
The following information largely covers options available for provisional tax payments. However it is also relevant to payments of GST and other taxes.
Q: What if I can’t pay my terminal tax on 7 April 2020?
A: For businesses which have been significantly adversely affected by COVID-19, an instalment arrangement can be entered into with Inland Revenue. You or your tax agent can send a secure email via myIR prior to 7 April 2020 requesting the due date be extended. The request should suggest date/s for when payment can be made. The email should provide context for the request (i.e. set out the type of business, how long it has been operating and how it has been significantly adversely affected by COVID-19). Using a tax pooling intermediary may also provide the ability to defer the payment of terminal tax by 75 days.
Q: Will use of money interest be charged and can I get it remitted?
A: Use of Money Interest (UOMI) is still payable on underpaid tax even where an arrangement is sought out and agreed. As at the time of writing the taxpayer’s paying rate is 8.35%; however, the Government passed legislation under urgency to give the Commissioner discretion to waive UOMI charges if the taxpayer’s ability to make payment on time is significantly adversely affected by COVID-19, has experienced and income decline of at least 30% (compared to the same month 12 months earlier), and has explored other options for financial support (e.g. bank financing or loan renegotiation). This will apply to all tax payment types due on or after 14 February 2020 provided you ask for relief and make the underlying tax payment as soon as practicable. The ability for the Commissioner to remit interest will be limited to a period of 24 months.
Q: I have a provisional tax instalment for 2020 coming up. I have paid instalments using the standard method so far, but the income for 2020 will be a lot lower as a result of COVID-19. What are the consequences if I estimate my 2020 provisional tax downwards?
A: You can estimate your residual income tax (RIT) for 2020 downwards on or before your final instalment date, provided this estimate is “fair and reasonable”.
Assuming a March balance date, the estimate must be based on what you think actual RIT will be for the year ended 31 March 2020, reflecting any drop in income (bear in mind COVID-19 will have mostly impacted the last quarter). You must revise estimates (until final instalment date of 7 May) if it ceases to become fair and reasonable at any point.
Estimating provisional tax means that UOMI could be payable from the first provisional tax instalment date. This is because UOMI is calculated based on the difference between the actual RIT that would fall due on each instalment date compared to the actual amount paid each instalment date. A safer alternative for the final instalment is to make a payment based on “expected RIT” (see below), as UOMI will only be payable from the final (third) instalment in this case.
Q: I have a final instalment due and have used the standard method so far. However income for 2020 will have dropped so are there any other options if I don’t want to estimate?
A: If your actual RIT for 2020 will be more than $60,000 and you will not be in the safe harbour rules for UOMI purposes, you can still choose to pay a lower final instalment based on“expected RIT” and still remain within interest concessional rules that apply as if you have been using the standard uplift method for this year. This will allow you to pay less than the instalment calculated under the standard method. UOMI will be payable from the third instalment date to the extent actual 2020 RIT is more than the total of
instalments made. Interest will be receivable if RIT is less that the total payments made. As at the time of writing the Commissioner’s paying rate on overpayments is 0.81%.
If you expect actual RIT for the 2020 income year to be less than $60,000, you would be a safe harbour taxpayer and only subject to UOMI from terminal tax date, provided you have made all provisional tax instalments using the standard method correctly and on time. The “expected RIT” rule does not apply in this case. Therefore, to remain a safe harbour taxpayer, you would still need to make all required instalments in accordance with the standard uplift method and on time, or risk having UOMI applied from the final instalment.
In both cases, you may be able to get any UOMI charged remitted if the reason you pay less at the final instalment is because of COVID-19 hardship and you meet the criteria for remission.
Q: Can I get excess provisional tax payments made transferred?
A: Yes. If you have paid more provisional tax than required, you can, or your tax agent can, request excess tax be transferred (prior to the filing the 2020 tax return) to another taxpayer who is a “close associate”. For example, a shareholder employee, a partner, a relative, a company in the same group, etc). This might occur if:
- you have paid in accordance with the standard method and then estimate downwards; or
- you had already estimated and revise an estimate downwards; or
- You have made voluntary installments over the standard uplift amounts.
Once the third installment date has passed, you will not be able to estimate lower. Therefore, the other option will be to file the 2020 income tax return as soon as possible once the IR system rolls over for the new tax year to access overpaid tax, assuming your actual RIT will be lower than the total amount of 2020 provisional tax paid under the standard method.
Q: Can I get excess provisional tax refunded?
A: Yes. If you have paid more provisional tax than required because of the reasons immediately above, you can, or your tax agent can, apply to have any excess provisional tax refunded. If your business operates as a company, any refund may be limited to the closing balance in the most recently filed imputation credit account.
Q: Can tax pooling help with upcoming provisional tax payments?
A: Yes. Tax pooling can provide other options for managing cash flow. For example:
- Tax Finance products allow you to make your provisional tax payment on a future date you choose for a fixed fee upfront. For example, payments of 2020 provisional tax can be deferred;
- Making payments into a tax pool based on forecast liabilities rather than on standard uplift without estimating. Interest is payable (at more competitive rates) on the lesser of your actual RIT liability or that payable under the standard uplift method. If you already use tax pooling and have made deposits into a pool, refunds of overpaid tax can be paid quickly; and
- Tax pools can provide an extra 75 days past terminal tax date to settle 2019 terminal tax.
Penalties and relief
Q: How is a late payment penalty calculated?
A: Generally, late payment penalties are applied to “unpaid tax” outstanding at a default date (i.e. either at its due date or at a re-set collection date). For certain cases, late payment penalty will not be applied if this is the first late payment within the last two years.
A taxpayer is liable for a 1% initial late payment penalty applied on the day after the due date, with a further 4% applied at the end of the 6th day after the first 1% penalty is applied.
A taxpayer may also be liable for a further 1% incremental late payment penalty each following month. Although incremental late payment penalties are no longer applied to GST, provisional tax, income tax, but could be applied to outstanding PAYE and fringe benefit liabilities.
Q: What about late payment penalties for not making instalments of provisional tax?
A: Late payment penalties can arise on unpaid provisional tax due on a particular instalment date to the extent that “provisional tax payable” exceeds “provisional tax paid”. However, when the interest concessional rules apply, the basis for the penalty will be the lower of the instalment amount or 1/3 of your RIT.
Q: Will late payment penalties be written off?
A: The CIR already has the discretion to remit penalties for taxpayers and it has publicly stated it will be flexible in this regard, provided that those that can pay, do pay their tax. Remission will likely be available if your business is experiencing hardship as a result of COVID-19.
Q: What are the consequences if I do not file a return on time and is there any relief?
A: Inland Revenue can charge a late filing penalty if you fail to file a tax return on time. Although the filing fees are fairly modest, ranging from $50 to $500 for income tax returns (depending on net income). The late filing penalty for a GST return is $250 (invoice / hybrid basis) or $50 (payments basis) and the fee for failing to provide employment income information in relation to a month is $250.
Importantly, Inland Revenue has promised that it will “be flexible” in the way it approaches filing obligations and tax debt. In this regard any late filing fees are
unlikely to be imposed if you cannot file a tax return if you are physically or financially prevented by doing so because of COVID-19 factors.
Inland Revenue would still like you to file tax information, even if you can’t make the associated tax payments presently.
Q: What is an instalment arrangement?
A: You may be able to enter an instalment arrangement with the Commissioner to clear unpaid tax if you cannot make upcoming payments on time due to COVID-19. Factors the Commissioner may consider include:
- Whether allowing an instalment approach to collecting tax would maximise the recovery of outstanding tax and allow a business to get back on its feet;
- Whether you are in a position to pay all the tax immediately or not;
- Other relevant information to the current situation, such as how long you have been in business, the type of business and how COVID-19 has affected your business.
If this financial relief is sought prior to defaulting, only the 1% initial payment penalty will likely be automatically applied, assuming agreement is reached on the arrangements and you comply with the arrangement. The Commissioner has discretion to remit all penalties however.
The content of this article is accurate as at 27 March 2020, the time of publication. This article does not constitute advice; if you wish to understand the potential implications of current events for your business or organisation, please get in touch. Alternatively, our COVID-19 webpages provide information about our services and provide contacts for relevant experts who can help you navigate this quickly evolving situation.