Provisional tax pooling
Tax pooling and use-of-money interest (UOMI)
Tax pooling has been introduced to reduce taxpayers' concerns and costs from exposure to use-of-money interest (UOMI) in calculating their provisional tax, end-of-year tax and from reassessments of income tax. Tax pooling can also be used to meet increased obligations to pay tax (including from reassessments) for some non-income tax revenues in certain circumstances.
- About tax pooling and UOMI
- How tax pooling works
- Payments to a tax pooling account
- Resident withholding tax
- Tax deduction for interest payments
- Imputation credits
- What tax pooling can be used for
- What tax pooling cannot be used for
- Further information
- How to contact tax intermediaries
About tax pooling and UOMI (use-of-money interest)
Often, the amount of income tax a taxpayer is actually liable for is uncertain. The amount paid during the year as provisional tax reflects the taxpayer's best judgment of the law on a large number of technical issues, but if the taxpayer's judgment of their liability is incorrect, and they have underpaid tax, they may be exposed to UOMI.
Taxpayers may also find themselves in a situation where they have had their tax in a particular period quantified and/or assessed. However for some reason this amount has been reassessed. This could for example be the result of an error the taxpayer has identified in the calculation of their tax liability for the period, or at the resolution of a dispute.
If there has been an overpayment of provisional tax, they may receive credit UOMI. However, the UOMI rate applying to underpayments is higher than that applying to overpayments. In some cases the underpayment rate is higher than a company's commercial borrowing rate.
Tax pooling will allow taxpayers to pool tax payments, offsetting underpayments by overpayments within the same pool, thereby reducing their UOMI exposure. The pooling arrangement will be made through a commercial intermediary, who will charge clients that acquire tax pooling funds and compensate depositors whose funds are acquired by another client.
Intermediaries will be able to pay a higher rate of interest to taxpayers who have overpaid their tax into the pool. They will charge a lower rate of interest than the UOMI rates to those who have underestimated their tax (having purchased from the pool funds).
How tax pooling works
Taxpayers who want to take advantage of tax pooling should contact a tax pooling intermediary.
Intermediaries operate "tax pooling" accounts with Inland Revenue. The tax payments they deposit into these accounts are held until the intermediary instructs Inland Revenue what to do with them, for example, transferring a payment to a taxpayer's income tax account or to an account where an assessment or reassessment as appropriate has been made.
When a payment is transferred into a client's tax account, it will be treated as a tax payment made to that account, either on the date it was deposited to the tax pooling account, or at a later date, as instructed by the intermediary (or determined by Inland Revenue in certain circumstances).
An intermediary will hold payments in trust for the depositor until they need to be actioned.
Payments to a tax pooling account
Payments can be made to a tax pooling account through an intermediary for:
- voluntary provisional tax payments, and/or
- normal provisional tax instalments (instead of being paid into the taxpayer's income tax account).
- reassessments of income tax
- meeting increased obligations and/or reassessments of some non-income tax revenues
- deferrable tax.
When an intermediary accepts a payment from a taxpayer for deposit in a tax pooling account, the payment does not, at that stage, satisfy the taxpayer's tax obligations. The amount will not become "tax paid" until a transfer is made from the tax pooling account to the taxpayer's own tax account with Inland Revenue.
This means that if a taxpayer chooses to pay their provisional tax instalments into a tax pooling account, they may still receive reminder notices before each instalment date and may receive a statement of account from Inland Revenue showing the instalments as "overdue" (because the payments are not in their income tax account). However, Inland Revenue will not charge any late payment penalties or UOMI, nor send any letters requesting payment until an income tax assessment has been raised.
For a reassessed tax liability or an increased obligation to pay tax, taxpayers have 60 days after any reassessment or written notification of the increased obligation to make payment. Any payments made to a tax pooling intermediary, for example during the course of the disputes process, to pay this amount will not show up in the taxpayers account until the amount has been transferred from the intermediary. No late payment penalties will be charged to the account during the 60 day period.
When making a deposit to a tax pooling account, an intermediary must provide certain information to Inland Revenue. This includes the name and tax file number of each taxpayer who has contributed to the amount deposited, and the amount they have contributed.
At the appropriate time, the intermediary may then request Inland Revenue to transfer a payment from their tax pooling account to a taxpayer's own account to meet income tax obligations and reassessments or increased obligations in respect of income tax and certain other taxes.
Note:
Tax pooling legislation states that the Commissioner of Inland Revenue is not required to oversee or audit the operation of a tax pooling account.
Neither is the Commissioner liable for any loss that a person suffers because:
-
an intermediary does not deposit a taxpayer's payment into a tax pooling account
-
an intermediary makes an unauthorised withdrawal from a tax pooling account
- an intermediary fails to request a transfer of funds from a tax pooling account to a taxpayer's Inland Revenue account.
Resident withholding tax
If a tax intermediary pays interest to a taxpayer for a payment they have made, the intermediary will be required to withhold resident withholding tax from that interest unless the recipient holds a valid certificate of exemption.
Taxpayers are not required to deduct resident withholding tax from interest payments they may make to a tax intermediary.
Tax deduction for interest payments
Interest payments made either to an intermediary by a client taxpayer, or by an intermediary to a client taxpayer, are deductible for income tax purposes.
What tax pooling can be used for
The only regular tax payments tax pooling funds can be applied to are provisional tax and end-of-year tax. However, tax pooling funds can also be applied to reassessments or increased obligations to pay certain other taxes, arising from for example voluntary disclosures, resolution of disputes and deferred tax.
For reassessments or increased obligations to pay tax, pooling funds will only be available for the difference between the previously assessed amount or increased obligation and the new reassessed amount or increased obligation. The request for pooling funds must be made within 60 days of being notified of the reassessed amount or increased obligation by the Commissioner.
What tax pooling cannot be used for
Tax pooling funds cannot be used to meet regular tax payments such as GST and PAYE (except in periods where a reassessment has been made or an increased obligation results from an adjustment). This is because for these types of payment the amount due is known by the due date unlike provisional tax.
If it has been over 75 days (76 days for October, November and December balance date customers if their end-of-year tax date falls within a tax year that has a 29 February in it) since a customers end-of-year tax date for provisional tax and a liability for a penalty exists, or over 60 days since the customer was notified by the Commissioner of a reassessment or increased obligation to pay tax, tax pooling funds can not be applied to these amounts at the earlier effective date. These amounts can however be applied at the date the transfer is requested.
Further information
You can find more details of changes to the tax pooling rules enacted on 29 August 2011 and examples of how tax pooling funds can be used in the Tax Information Bulletin Vol 23 No 8 - October 2011.
How to contact tax intermediaries
If you think provisional tax pooling may benefit you or a client, you may find the following list of tax intermediaries helpful. Please note that we do not endorse one particular intermediary over any other.
Bailey Ingham
18 Maniapoto Street
PO Box 225
Otorohanga
Business Phone: +07 873 7325
Email. bailey.ingham@xtra.co.nz
Electronic Tax Exchange Ltd (ETX)
PO Box 155 042, Wellesley Street
Auckland 1141
Phone: 64 9 363 3732
Fax: 64 9 363 2727
Email: support@etx.co.nz
Website: www.etx.co.nz
Provisional Tax Finance Ltd
PO Box 113 068, Broadway
Newmarket
Auckland
Phone: 64 9 950 3516 or 64 9 950 3515
Fax: 64 9 523 9763
Email: contact@taxfinance.co.nz
Website: www.taxfinance.co.nz
Tax Management New Zealand Ltd (TMNZ)
PO Box 25 050
Auckland
Phone: 64 9 575 9105
Fax: 64 9 575 9115
Email: admin@taxmanagement.co.nz
Website: www.taxmanagement.co.nz
Tax Pooling Solutions Ltd (TPS)
PO Box 37 830
Parnell
Auckland 1151
Phone: 64 9 948 8833
Email: enquiries@taxpooling.co.nz
Website: www.taxpooling.co.nz/
Date published: 20 Oct 2011
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