Section 183ABAC applies to the 2021 tax year terminal tax on which UOMI is imposed in relation to provisional tax instalment dates, where the provisional tax method used was the standard method or the estimation method. Whether section 183ABAC can provide relief from UOMI for provisional taxpayers for the 2021 tax year depends on the following factors:
- The 2020-21 residual income tax (RIT) must be at least $5,000 and less than $1 million.
- The taxpayer’s ability to make a reasonably accurate forecast of their 2021 RIT for the purposes of paying their 2021 provisional tax obligations was significantly adversely affected by COVID-19 and as a consequence the taxpayer failed to pay the relevant portions of their provisional tax by the relevant instalment dates.
- The UOMI liability does not arise from an election under section IZ 8 (loss carry backs) of the Income Tax Act 2007, or by a company in the same group of companies as the provisional taxpayer.
- Whether the taxpayer made all their instalments in full and on time and has RIT of less than $60,000. (This would mean they fall withing the safe harbour rules, and therefore do not incur UOMI for late or underpaid provisional tax).
- As at their last instalment date the taxpayer’s provisional tax obligations were based on the standard method or the estimation method.
- When payments were made and how they were applied to amounts owing in the income tax account.
The following scenarios are intended to provide guidance for some situations that Inland Revenue has identified. The scenarios have been drafted based on current law and may change as a result of the additional legislation changes.
The relief available under section 183ABAC is in addition to any relief that may be available under section 183ABAB.
Discovery Traders Limited is an export company based in Twizel that sells high quality Manuka honey to China. Due to the closing of the borders under COVID-19 it is very uncertain when the shipping lanes to China will be fully opened to international trade and how the situation will impact sales by Discovery. Based on the information that Discovery has at the time it is due to make its first instalment of provisional tax for the 2020–21 tax year it estimates its tax liability for the year to be $80,000 and makes its first provisional tax payment accordingly.
However, the trading lanes fully open a lot sooner than Discovery believed. They subsequently change their estimate and make increased payments at the second and third provisional tax instalment dates
Despite this, they incur UOMI on the underpaid first instalment. They seek remission of that UOMI on the basis that at the time they had no idea that the trading lanes would open so quickly. Discovery's residual income tax is less than $1 million and because of the uncertainty created by the COVID-19 situation their ability to accurately forecast their income has been impaired. However, as soon as Discovery realised this, they amended their estimate accordingly. Discovery would be entitled to remission under new section 183ABAC.
Excelsior Exteriors Limited is a building company based in Tauranga. They have been affected by COVID-19 in two ways, firstly, there was the initial lockdown which meant that work on their current projects ceased until the alert level reduced to level 2 but then, secondly, since the reduction in alert level they have been inundated with new projects as people who cannot travel overseas decide to undertake renovations to their houses. This has seen their revenue increase over prior years.
James, the owner of Excelsior, notes that the Commissioner can now remit interest on underpayments of provisional tax so decides to make no payments of provisional tax for the year on the basis that Excelsior will get this remitted when they file their tax return notwithstanding the increase in business during the year.
In this case the Commissioner would not consider a remission of interest as Excelsior’s ability to forecast their income at each instalment has not been affected by COVID-19. It was clear that Excelsior was going to have a tax liability greater than zero, yet no effort was made to make tax payments to reflect that.
Enterprise Bank Limited is a registered bank in New Zealand and has an annual turnover of $700 million. Its operations have been largely unaffected by COVID-19 and in some cases its profits have increased due to more lending being made to smaller businesses due to COVID-19.
Enterprise has a subsidiary V’ger Limited which sells pet insurance to Enterprise customers. V’ger outsources its accounting functions including forecasting to Enterprise. V’ger has been affected by COVID-19 as fewer people are getting pets than in a normal year.
V’ger estimates its provisional tax payable for the year, however, it incurs interest for underpaying its provisional tax compared with its actual tax liability for the year. V’ger underpaid as it made an error in their original estimate.
Although V’ger has residual income tax of less than $1 million it has the ability to accurately forecast and adjust their provisional tax payments for the year and that ability has not been adversely affected by COVID-19. The Commissioner will not consider remitting interest for V’ger.