A major change to tax pooling was announced the by Minister of Revenue recently.
Tax pooling allows tax payers to trade their under or over payments of provisional tax and reduce the amount of interest they need to pay. This process is conducted by a tax pooling intermediary like TMNZ.
Some business routinely overpay their income tax to give them certainly. They pay this money into a tax pool. When they file their tax returns, they transfer the amount they need themselves allowing for the surplus to be traded with businesses who have underpaid tax. They earn an improved rate of interest on the money.
For a one off upfront charge, the business who owes tax can arrange for the intermediary to pay their obligation. They end up paying less in interest than they would have if they paid the IRD directly. It also ensures that all outstanding debts are paid on time and in full, avoiding any penalties.
However, until recently, tax pooling could not be used to meet Use of Money Interest charges. These charges are levied by the IRD on outstanding balances, where the amount of provisional tax paid is less than the actual amount owing for a period. This has now changed.
The real winners will be those taxpayers who have tax to pay having been subjected to an historic audit by the IRD. They will be able to use tax pooling more effectively against any back-year liabilities.
Additionally, if taxpayers are in a protracted dispute with the IRD, they can use tax pooling to ‘stop-the-clock’ so that Use of Money Interest will no longer accrue at 8.4 per cent. It has the effect of capping any interest charge whilst the taxpayer goes through any lengthy and protracted dispute.
The change is effective from July, 2014. We welcome the change and believe that the change in legislation will remedy what was clearly an unintended legislative oversight.