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Tax pooling reduces concerns and costs from exposure to use-of-money interest (UOMI) in calculating provisional tax, end-of-year tax, and from reassessments of income tax.
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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).
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 us 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 processed or transferred.
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
- agreed delay tax
- UOMI payable on reassessments of income tax and some non-income tax revenues, deferrable tax and agreed delay 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 or UOMI 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 us.
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 us showing the instalments as "overdue" (because the payments are not in their income tax account). However we will not charge any late payment penalties or UOMI, or 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 (including any associated UOMI). 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. Late payment penalties will generally not 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 us 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. The intermediary may also request us to transfer a payment from their tax pooling account to meet the UOMI payable on reassessments or increased obligations in respect of income tax and certain other taxes.
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.
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.
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 and any UOMI payable on the increased amount payable or deferrable 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 same restriction applies to using pooling funds to pay the associated UOMI on these increased amounts and to pay deferrable tax. The request for pooling funds must be made within 60 days of being notified of the reassessed amount or increased obligation by the Commissioner.
From 24 February 2016 tax pooling can also be used, with the Commissioner's agreement, to pay an amount of tax (referred to as "agreed delay tax") and UOMI payable on the agreed delay tax in certain circumstances where a taxpayer has initiated a dispute under Part 4A of the TAA. Tax Information Bulletin Vol 2 No 3, April 2016 provides further details of these situations and examples.
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 taxpayer's end-of-year tax date for paying their income, or over 60 days since the taxpayer was notified by the Commissioner of a reassessment or increased obligation to pay tax, tax pooling funds cannot be applied to these amounts, or any associated UOMI at the earlier effective date. These amounts can however be applied at the date the transfer is requested.
The establishment and maintenance of a tax pooling account and rules governing tax pooling intermediaries are set out in sections 15O and 15T of the Tax Administration Act 1994 (TAA).
In order for a person to operate as a tax pooling intermediary they must make an application to the Commissioner of Inland Revenue. The Commissioner must be satisfied that the applicant meets the legislatively prescribed criteria. Applications should be sent to:
Hilary Wylde, Service Manager
Investigations and Advice
PO Box 76 198
Tax pooling intermediaries must operate systems to protect personal information and payment details that:
- are obtained in the course of running their tax pooling accounts, and
- record taxpayer balances held in their tax pooling accounts.
A tax pooling intermediary is allocated their own tax pooling account with us into which taxpayer funds received by the intermediary are deposited.
An intermediary must hold deposits they receive on trust for the person on whose behalf the amount was deposited. Tax pooling intermediaries may use the services of an independent trustee to administer their tax pooling accounts including:
- refunds, and
- transfers into and from their tax pooling account.
Where a tax pooling intermediary provides us with the details of the arrangements they have in place with an independent trustee in administering their tax pooling account, we will act in accordance with these. Such arrangements can include restrictions on who is authorised to interact with us on behalf of the intermediary and/or their independent trustee on:
- making deposits
- requesting transfers, and
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
- makes an unauthorised withdrawal from a tax pooling account, and/or
- fails to request a transfer of funds from a tax pooling account to a taxpayer's Inland Revenue account.
Under section 15Q of the TAA the following have been provided by the Commissioner of Inland Revenue to operate tax pooling accounts. 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.
18 Maniapoto Street
PO Box 225
Business Phone: 07 873 7325
|Provisional Tax Finance Limited
PO Box 11 814
Phone: 64 9 950 3516 or 64 9 950 3515
Fax: 64 9 523 9763
|Tax Management New Zealand Limited
PO Box 105 435
Phone: 64 9 575 9105
Fax: 64 9 575 9115
|PwC Tax Pooling Solutions
188 Quay Street
Private Bag 92162
Phone: 64 9 355 8291
|Tax Traders Limited
PO Box 74479
Phone: 0800 829 872
The timing of a transfer from a tax pooling account to a taxpayer's tax account is dependent on a number of different factors. It is therefore not easy for us to identify taxpayers who have arranged to use tax pooling to pay their tax and exclude them from debt collection contacts and/or prevent the issue of correspondence, such as statements of account, which show the tax to be paid through tax pooling as due or even overdue.
The most common period of time where this issue arises is leading up to the terminal tax due date and during the 75 days following this date. During this period we receive and process tax pooling transfers for the previous year's provisional tax and income tax. Because we start our debt recovery processes shortly after a taxpayer's terminal tax date there can be an overlap between these activities. We may therefore contact taxpayers who are using tax pooling to meet their tax obligations but whose tax pooling payments have not yet been credited into their tax account.
If taxpayers who have arranged for a tax obligation to be met through a tax pooling intermediary are contacted by us in respect of that tax amount, they can advise us that this is the case and we will note it in our records. This won't prevent automated actions (such as the issuing of statements of account showing a debt is still owing) from occurring pending the transfer of the tax pooling funds, but it will ensure that no proactive recovery action is taken by our staff in respect of those tax amounts.
Once a tax pooling transfer has been processed an updated statement of account will be issued showing the correct account balance.
You can find more details of changes to the tax pooling rules enacted on 29 August 2011 and 24 February 2016 and examples of how tax pooling funds can be used in Tax Information Bulletin Vol 23 No 8, October 2011 and Tax Information Bulletin Vol 28 No 3, April 2016.