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27 Apr 2017
Tax payments at this time of year can cause cash flow problems, with 2016 terminal tax payable by 7 April (or in some cases 7 February) and the final instalment of 2017 provisional tax to be paid by 7 May (along with the March GST). The February due date applies to taxpayers who don’t use a tax agent or have lost their extension of time.
Good tax planning, with the assistance of your accountant, will help with future cash flow, but doesn’t solve problems that already exist. Don’t bury your head in the sand and hope the problem will disappear.
If payment is not received by due date, the current penalties are 1% imposed the day after due date and a further 4% on the 7th day after due date. Every month an additional 1% is charged on the unpaid balance. If this is your first late payment in a two year period, IRD may send a warning letter offering a “grace period” for payment.
In addition to penalties, interest is charged on the outstanding balance. The current rate of 8.27% reduces to 8.22% from 8 May. Could you increase your borrowings at a cheaper interest rate, to pay the outstanding tax?
Another option is to purchase tax through a “tax intermediary”. Our firm uses this extensively for a wide range of taxpayers. The final date for paying for tax purchases is 75 days from terminal tax due date. Taxpayers with tax due 7 April 2017 have until mid June 17 to pay
As provisional tax is only an interim tax, penalties are not applied until the actual 2017 tax return is filed. If a provisional tax instalment is unpaid or late paid, penalties & interest are backdated to that date. As 2017 terminal tax is not due until April 18 (ignoring those with a February due date), we have until June 2018 to purchase 2017 provisional tax.
The interest rate paid to the tax intermediary is less than the IRD rate and penalties can normally be totally eliminated.
The final option for paying overdue tax is to make an arrangement with the IRD. If this is done before due date, only the initial 1% penalty is charged, as long as the arrangement is adhered to. Interest still applies however. If the arrangement is made after due date, existing penalties remain, but no further penalties are charged.
There has been some good news from the IRD recently. The incremental monthly 1% penalty will not apply to new debt for certain tax types including income tax and GST. GST will apply from 31 March 2017 return onward and income tax for the 2018 income year.
Another new piece of legislation, means that provisional taxpayers who fall outside the safe harbour rules (e.g. companies, trusts and those with high levels of tax), from the 2018 tax year, have until the final instalment to pay sufficient provisional tax, without interest applying. The previous instalments, based on the standard uplift of the prior year’s tax, must have been paid on time. Interest will still apply from the final provisional tax date until the terminal tax for that year is paid. Again payment through a tax intermediary could reduce this interest cost.
Remember; see your tax adviser to reduce your exposure to penalties and interest. It’s not too late.
For more information on how we can help your business, get in touch