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.
Tax payments due
Q: I have a tax payment upcoming, what if I don’t have sufficient cash to make this payment?
A: If your business is unable to pay taxes on time due to the impact of COVID-19, it is possible to apply to Inland Revenue to propose an instalment arrangement. An instalment arrangement is an agreement with Inland Revenue to spread out payments of tax over time. This can be arranged simply by logging in to your myIR Account.
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 responding 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: Will use of money interest be charged and can I get it remitted?
A: Use of Money Interest (UOMI) will still accrue on underpaid tax even where an instalment arrangement is sought out and agreed to. The taxpayer’s paying rate dropped from 8.35% to 7.0% on 8 May 2020. However, the Government enacted legislation in late March to give the Commissioner of Inland Revenue (CIR) discretion to waive UOMI charges if the taxpayer’s ability to make payment on time has been significantly adversely affected by COVID-19. This measure will apply to all tax payment types due on or after 14 February 2020 provided you contact Inland Revenue to request relief and make the underlying tax payments as soon as practicable. The ability for the Commissioner to remit interest will be limited to a period of 24 months. If further assistance is required at a later date, such as having to renegotiate the terms of the arrangement, again a taxpayer must contact Inland Revenue as soon as practicable.
Q: I have a provisional tax instalment coming up. I have paid instalments using the standard method so far, but the income will be a lot lower as a result of COVID-19. What are the consequences if I estimate my provisional tax downwards?
A: You can estimate your residual income tax (RIT) downwards on or before your final instalment date, provided this estimate is “fair and reasonable”.
Any estimate must be based on what you think actual RIT will be for the year, reflecting any drop in income. You must revise estimates (until final instalment date) if it ceases to become fair and reasonable at any point.
This may sound good in theory, but estimating provisional tax requires care because 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 may be to stay with the standard method for the first and second instalments and then for the final instalment, 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 is technically receivable if RIT is less than the total payments made, but note that the Commissioner’s paying rate on overpayments dropped from .81% to 0% with effect from 8 May 2020.
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 request 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 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 instalments over the standard uplift amounts.
Once the third instalment 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: What options are there for assisting with 2021 provisional tax?
A: The Government has increased the provisional tax threshold from $2,500 to $5,000 for the 2020-2021 income year. This means, for taxpayers whose 2020 RIT will be less than $5,000, 2021 provisional tax will not be payable at all. Instead the liability for 2021 will be payable in one instalment on terminal tax date, which for most taxpayers will be 7 February or 7 April 2022. This may be an incentive to file the 2020 tax return as soon as possible so that a first instalment payment will not be necessary on 28 August 2020. Other options that may assist with managing provisional tax payments include using a tax pooling intermediary (see below), estimating downwards (noting that this option may come with UOMI implications) or investigating using the loss carry back measures recently introduced (more information can be found in our separate article here).
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 or 2021 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 extension to settle 2019 terminal tax. For example, to use tax pooling funds in order to satisfy 2019 terminal tax, the transfer request must normally be made by 75 days from terminal tax date, i.e. this would have been 21 June 2020. However, the CIR has issued a temporary determination extending this to 365 days where certain conditions are met. These are that a contract with the tax pooling intermediary must be in place by 21 July 2020 and the person’s business must have experienced or will be expected to experience a significant decline in revenue as a result of COVID-19.
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 and you have entered into an instalment arrangement with Inland Revenue.
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: As noted earlier, 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 originally published on 7 April 2020, was updated for recent developments and is considered correct as at 1 July 2020, the time of re-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.