Date posted: 5/08/2020 3 min read

Successfully working with Inland Revenue to reduce provisional tax burden

New legislation creates a “win-win for NZ businesses and Inland Revenue”.

In Brief

  • CA ANZ has been engaging with Inland Revenue on provisional tax changes
  • New legislation allows taxpayers using the standard (uplift) method to pay their provisional tax to pay a reduced amount in line with their forecasted expectations
  • Use of money interest (UOMI) and penalty risk also substantively removed

Chartered Accountants Australia and New Zealand has been engaging with Inland Revenue to ensure 2021 provisional tax is as simple, certain and manageable as possible for Kiwi SMEs affected by COVID-19.

The COVID-19 Response (Further Management Measures) Legislation Bill (No 2) was introduced in early August to allow taxpayers who use the standard (uplift) method to pay their provisional tax to pay a reduced amount in line with their forecasted expectations and crucially, with the knowledge that use of money interest (UOMI) and penalty risk can be substantively removed.

The legislation was a COVID response measure based on CA ANZ engagement with Inland Revenue.

John Cuthbertson FCA, New Zealand Tax Leader for CA ANZ said the legislation created a “win-win for businesses and Inland Revenue.

“SMEs now have the certainty of a provisional tax method they know well, while paying an appropriate amount of tax for a reduced level of business. 

“This could significantly free up cashflow as businesses can put aside money based on their actual or forecasted earnings in the current year rather than what they earned last year.

“There’s likely to be an expectation that larger and more sophisticated taxpayers will be better able to forecast provisional tax. For those taxpayers it’s less likely that remission will be provided beyond the third instalment date,” Cuthbertson said.

Previously, businesses using the uplift method who short paid were potentially subject to UOMI from the first installment date, along with late payment penalties. The onus lay with businesses to get their installment amount accurate and on time, or to overpay or enter a tax pooling arrangement. 

Cuthbertson said the legislative changes, coupled with the COVID-19 remission extension, means taxpayers will be able to proceed to pay their provisional tax as if they were still within the uplift method. “That’s even where they don’t technically qualify due to the amount paid being less than calculated based on prior years.”  

The details

Who’s this for?

SME taxpayers currently using the standard (uplift) method who have been adversely impacted by COVID-19, with 2021 residual income tax less than $1m.  

What does the change do?

Extends the UOMI remission power (introduced in March in response to COVID-19) to also cover short payment of 2021 provisional tax. There’s no requirement to formally estimate when the amount of tax is less than that due under the uplift method.

Anything else?

There’s an expectation that taxpayers are making a reasonable attempt to forecast their tax position and to pay tax at each installment based on that forecast.  

Taxpayers need to apply to the Commissioner to have interest and penalties remitted.  The commissioner may agree to remit if the taxpayer has asked for relief as soon as practicable and has paid their 2021 terminal tax.

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