Inland Revenue charge taxpayers Use of Money Interest (UoMI) on overpaid tax. This is typically applied to provisional tax payments.

The rates are regularly reviewed to ensure that they are aligned to current market interest rates and were last reviewed in May 2012. New rates will be introduced by the department from 8 May, 2015.

The interest rate on underpaid tax will rise from 8.40% to 9.21%.

If you overpay tax, you are entitled to interest from the department. The interest rate on overpaid tax will rise from 1.75% to 2.63%.

Just like a casino, the house always wins.

The interest rates are set as outlined in the Taxation (Use of Money Interest Rates Setting Process) Regulations 1997.  The rate is determined by the Reserve Bank of New Zealand floating first mortgage new customer housing rate plus 250 basis points. The justification for the rate is that the Government in an involuntary and unsecured lender and has no ability to assess the credit-worthiness of the taxpayer. It is also designed to dissuade taxpayers from using IRD as a bank.

The rise is a good reminder to check that your provisional tax payments are sufficient to cover any increase in income over the last financial year. You do have the option of making a voluntary payment prior to the last provisional installment each year to minimise any interest. Alternatively tax pooling is a popular option.

If you are uncertain, please do not hesitate to contact us for more information.

Alternatively, if your income has declined from the previous income year you are able to reduce the amount of provisional tax by re-estimating your provisional tax.

We do not support the decision to increase UoMI especially when there is such a benign environment for interest rates generally. It seems to us that it is contrary to IRD’s stated desire to ensure fairness in the tax system.

We believe that provisional tax should be replaced by the introduction of a pay as you go system such as the one that has operated in Australia since the year 2000. This system eliminates interest and gives small to medium businesses certainty.

A review of the New Zealand tax system has begun in earnest and we would urge our clients to contribute to the debate by accessing the IRD’s Making Tax Simpler website here.