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How interest rules apply

Two-way interest rules apply to all taxes and duties. These rules encourage you to pay the right amount of tax at the right time, compensate you if you pay too much tax by paying you interest and compensate the government if you pay too little tax by charging you interest.

How two-way interest applies 

If you overpay tax we'll generally pay you interest from the day after the original due date for the relevant return period (within certain rules).

If you underpay you'll be charged interest from the day after the original due date for payment.

This is similar to interest charged by banks on loans. Interest on tax underpayments is charged on the tax owing, which includes accumulated penalties and shortfall penalties. Interest isn't charged or paid on amounts of $100 or less of underpaid or overpaid tax.

Interest is calculated on a daily basis on the amount of overpaid or underpaid tax.  It does not compound and is not included when calculating penalties.

Find out the current and past interest rates

Interest applies to these taxes and duties 

Casino duty Child support deductions by employers
Fringe benefit tax (FBT) Gaming machine duty
Goods and services tax (GST) Imputation accounts
Income tax Lottery duty
Non-resident withholding tax (on interest and dividends) PAYE deductions
Qualifying company election tax Resident withholding tax (RWT) (on interest and specified dividends)
Student loan deductions by employers ESCT (employer superannuation contribution tax)
Totalisator duty Working for Families Tax Credits (WfFTC)

These interest rules don't apply to:

  • student loan repayments, or
  • child support payments.

When interest starts 

Underpayments of tax

Interest starts on the day after the original due date for the relevant return period. It ends on the day the tax is fully paid.

Overpayments of tax

Interest starts on the day after the original due date for payment of the tax, or the day after payment is made, whichever is later. In some cases you need to file a tax return before a refund can be made.

If this is the case, interest starts on the latest of:

  • the original due date
  • the day after the payment that generates the refund is made, that is when the credit becomes available
  • the date the return is filed.

In most cases, interest stops on the day the overpaid tax is refunded or applied towards paying other tax.

Interest on provisional tax

For the 2017 income year and before

If you're an individual

Interest is generally calculated from the date after your first provisional tax instalment date if:

  • you use the estimation option and your residual income tax (RIT) is more than $2,500
  • your RIT is $50,000 or more (for tax years 2010 to 2017) - whether or not you believed you were a provisional taxpayer for that particular income year. For income years before 2010, interest is generally calculated from the date after your first provisional tax instalment date if your RIT is $35,000 or more
  • you hold a Certificate of exemption from resident withholding tax (IR15C) and your RIT was more than $2,500.

If you're a non-individual

If your RIT is more than $2,500, interest is calculated from the day after your first instalment date.

For the 2018 income year onwards for both individuals and non-individuals

Interest is generally calculated from the date after your first provisional tax instalment date if:

  • you use the estimation option and your residual income tax (RIT) is more than $2,500
  • your RIT is $60,000 or more and you're an initial provisional taxpayer for that particular income year.

There are changes in debit and credit use-of-money interest (UOMI) on provisional tax when using the standard option, and when changing from the standard option to the estimation option for the final instalment, provided all required payments are made in full and on time.

When determining the interest start date, the $50,000 RIT threshold for individuals using the standard option has increased to $60,000. This threshold will also apply to non-individuals.

When UOMI applies from using the standard method (and required payments made in full and on time)

Provisional tax amount more than RIT

If end-of-year RIT is ... then credit UOMI is calculated ... from the ...
less than $60,000 on the difference between the provisional tax amount paid and the RIT terminal tax due date.
$60,000 or more on the difference between the provisional tax amount paid and the RIT last instalment date.

Provisional tax amount less than RIT

If end-of-year RIT is ... then debit UOMI is calculated ... from the ...
less than $60,000 on the difference between the provisional tax amount paid and the RIT terminal tax due date.
$60,000 or more on the difference between the provisional tax amount paid and the RIT last instalment date.

If you've paid all but your final instalment on time using the standard option then UOMI will apply from the final instalment due date. This will also apply if you changed to the estimation option at or before your final instalment due date.

If you pay an instalment late or don't pay it at all, UOMI will be charged from the due date of the instalment on the lesser of:

  • the amount of the instalment that was paid less the amount that should have been paid, or
  • your RIT divided by the number of instalments for the tax year less the amount paid.

The above changes may not apply if:

  • you're associated to specific persons or entities with one of you being a company and they aren't covered by the above standard option rules or they don't use the GST ratio option, or
  • you've entered a provisional tax interest avoidance arrangement.

If your RIT is $2,500 or less, you may be able to elect to become a provisional tax payer to receive credit interest on any provisional tax payments made.

There are special rules that determine when interest starts for new provisional tax payers who have started a taxable activity during the year.

Please see your tax return guide or our Provisional tax (IR289) booklet for more information.

Note  
The interest rules don't override specific provisional tax rules such as:
  • dates from when interest applies
  • the criteria used to establish who is a provisional tax payer.
The interest rates applying to provisional tax are the same as those for all taxes and duties.

Interest on GST refunds

Interest starts on the later of:

  • the day after:
    • the 15th working day after we receive your GST return, or
    • the original due date for payment, whichever comes first
  • the day after the return is received
  • the day after the payment that generates the refund is made.

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How interest applies to tax payments 

If you're late paying your tax or you don't pay the full amount, any payments you make will be used to clear your unpaid interest first and then be used against your unpaid tax. The exception to this rule is for payments of provisional tax, where payments are used for provisional tax instalments as specified by the taxpayer.

Credit interest may also be used to pay other unpaid taxes.

Interest as gross income

Interest paid on overpayments of tax is considered gross income and is assessable in the income year it's refunded to you in. This also applies if you have credited the amount of interest towards paying other unpaid tax.

If a reassessment of a return shows that you've overpaid your tax, you'll be paid interest on the amount that was overpaid. The interest paid to you as a result of this is assessable in the income year following the year of reassessment.

Example  
Maria's 2015 tax return is reassessed on 12 February 2017, and shows that she has overpaid tax, so Maria is paid interest on the amount she overpaid. This interest is assessable as gross income in Maria's 2017 income year.

Tax-deductible interest

Interest paid on underpayments of tax is deductible for business purposes, subject to the normal deductibility provisions, in the income year it is charged in.

If a reassessment of a return shows you owe more tax, the interest you pay on the underpayment is deductible in the income year following the year of reassessment, subject to the normal deductibility provisions.

Example  
Trevor Ltd’s 2015 tax return is reassessed on 7 December 2016 and shows that Trevor Ltd did not pay enough tax. Trevor Ltd is charged interest on the amount it owes. This interest is deductible in Trevor Ltd’s 2017 income year.

Interest on tax in dispute

When you challenge an assessment or disputable decision, you may defer payment of the tax in dispute while the dispute is being resolved.

If you're successful in the dispute, we'll refund any tax in dispute that you paid and pay you interest on it.

If we're successful, you'll be charged interest on any unpaid portion of outstanding tax.

Remission of interest

Interest can be remitted (legally forgiven) in limited circumstances, eg, where we've given you incorrect advice and that advice has directly resulted in an error. Remission also occurs when interest is correctly imposed, but a decision is made to relieve you of the liability to pay.

You must apply for remission in writing and you must provide evidence to support the fact that incorrect advice was given.

This isn't the only situation in which remission of interest may be granted. Each case is considered individually.

Cancellation of interest

Taxpayers are given extra time (usually 30 days) to pay a balance shown on a notice of assessment or a statement of account.

If the balance is paid in full within this period, the interest incurred between the issue date of the notice or statement and the date of the payment is automatically cancelled.

If payment is received after 30 days then the interest amount will recalculate, so the balance may not be cleared in full.