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04 Feb 2016
Burying your head in the sand regarding outstanding tax liabilities or overdue returns only compounds problems. Until returns are filed and payment arrangements are made, penalties and interest continue to accrue.
Filing of returns on time avoids unnecessary late filing penalties. These are $50 for GST on payments basis, $250 for GST on invoice basis and $250 for late filing of employer monthly schedules. Even if payment can not be made by due date, ensure that the return is filed on time.
Late payment penalties for income tax, GST and employer deductions are an initial 1% on the day after due date, a further 4% at the end of the 7th day after due date and a 1% incremental each month after due date. Note that, as these penalties are compounding, penalties get charged on the penalties already added.
Employers may be exposed to a further penalty on their PAYE returns – a non payment penalty of 10% each and every month that employer deductions remain unpaid. This is in addition to the late payment penalties covered above. Therefore in the first month a total of 15% may be charged in penalties with more than 11% in the following months. For example, if the deductions are $1000 for the month and the return isn’t filed on time and the amount isn’t paid, penalties in the first month would be $400. ($100 non payment, $50 late payment as well as the $250 late filing penalty). These high penalties reflect the fact that wage deduction amounts are not the employer’s funds, they are deductions from money belonging to the employees.
In addition to penalties, use of money interest is charged. This is currently 9.21% per annum. How does this compare to your bank overdraft or loan rate?
Often in times of tight cashflow, the IRD is one of the easiest creditors to let slip. They probably won’t call to find out why payment hasn’t been received, or refuse further credit. Once IRD payments start to slip, they often escalate. By the time the IRD phonecalls start, the debt can be substantial.
However, there is usually a solution. The most important point is to talk to either the IRD or your Accountant as soon as possible, preferably before there is a problem. IRD is open to arrangements that ensure overall the maximum amount of tax is collected.
Pre-emptive instalment arrangements (i.e. before tax overdue) result in only the first 1% penalty being charged on the amount outstanding at due date. No further penalties are charged as long as the arrangement is adhered to, although interest continues to be charged.
Instalment arrangements can be requested at any time. Any penalties already charged will stand, but as long as obligations under the arrangement are met, no further penalties will be charged. One of the main conditions of instalment arrangements is that all return filing and payments from that date forward are kept up to date.
In more severe cases, IRD may agree to write off some or all of the outstanding liabilities, on grounds of hardship. They expect all other avenues to have been exhausted first, such as sale of excess assets, bank loans to cover all or part of the debt etc. Every case is different when it comes to negotiating with IRD.
Your Accountant may also have access to tax pooling intermediaries, and may be able to eliminate penalties and reduce use of money interest through use of tax purchase or financing.
Remember, don’t be an Ostrich and choke on the sand – the IRD penalties. See your Accountant regarding your IRD problems as soon as possible, so they can assist you to sort them.
For more information on how we can help your business, get in touch