Understanding the new provisional tax environment. Chris Cunniffe / Chief Executive Officer James Stuart / Client Relationship Manager

Transcription

1 Understanding the new provisional tax environment Chris Cunniffe / Chief Executive Officer James Stuart / Client Relationship Manager

2 What we will cover today Why change is necessary What changes have been enacted How the new rules apply How tax pooling delivers an even better outcome

3 The Sky Tower opens after 2.5 years of construction, becoming the tallest free-standing structure in the Southern Hemisphere. Elton John sings Candle in the Wind at the funeral of Diana, Princess of Wales. Titanic opens and takes the world by storm. Winston Peters was the Deputy Prime Minister of New Zealand.

4 Why do people hate provisional tax?

5 Why do people hate provisional tax? Hard to get right and expensive to get wrong Doesn t correspond to when I get paid There is too much uncertainty Interest rate is punitive

6 How tax payments used to be: The miracle of P3 P1 P2 P3

7 How IRD expected it to be: Tax as viewed from an ivory tower P1 P2 P3

8 The reality: How clients earn their income P1 P2 P3

9 Why was UOMI introduced in 1997? Section 120A of the Tax Administration Act states that the purpose is to: Compensate CIR for loss of use of money Compensate taxpayers for paying too much Encourage correct payment of tax on time

10 UOMI rates FROM UNDERPAYMENT % OVERPAYMENT % SPREAD 8 Mar Mar Jun Jan May May May May

11 Issues with current system Single UOMI rate is a blunt instrument UOMI rates (and the rate spread) drives behaviour Inadequate safe harbour thresholds Tax Pooling was introduced in 2003 to address these problems

12 The new rules

13 Government business tax changes Extended Safe Harbour removing exposure to interest Give larger business a break no interest before P3 Move to real time payments for SMEs Increased withholding taxes tax contractors at source

14 Safe harbour for smaller taxpayers Safe harbour means no exposure to UOMI Includes all taxpayers with $60,000 liability or less Previously just available to individuals Removes 67,000 taxpayers from UOMI regime

15 Reform for other taxpayers No UOMI exposure before P3 Must pay P1 and P2 on Standard Uplift method At P3 pay the balance of the tax UOMI applies both ways from P3 Can Estimate P1 and P2, but fully exposed to UOMI

16 Standard Uplift The basics Best practice for provisional taxpayers to adopt the standard uplift method Provisional tax for a year is: 105% of previous year s RIT, or 110% of RIT of year before previous year

17 Standard Uplift The basics IRD can only apply UOMI and LPPs at a particular instalment date if you are deemed to be underpaid on the The amount due under standard uplift or 1/3 of the actual RIT due lesser of:

18 Example 1 Growth client 2017 RIT $300,000 Calculated RIT $570,000 $10K Flexitax $360K Actual RIT $580,000 $105K $105K Standard uplift P1 P2 P3

19 Benefits Example 1 Growth client Removed exposure to IRD UOMI Retained additional working capital Standard Uplift Calculated Liability P1 $105,000 $193,333 P2 $105,000 $193,333 P3 $370,000 $193,333 Ability to mitigate UOMI Estimating flexibility Working capital

20 Example 2 Client with reduced RIT 2017 RIT $300,000 Calculated RIT $210,000 Actual RIT $213,000 $70K $70K $70K $1K Flexitax $1K Flexitax Standard uplift $1K Flexitax P1 P2 P3

21 Benefits Example 2 Client with reduced RIT Removed exposure to IRD UOMI Retained additional working capital Standard Uplift Calculated Liability P1 $105,000 $71,000 P2 $105,000 $71,000 P3 $3,000 $71,000 Ability to mitigate UOMI Estimating flexibility Working capital

22 Example 3 Uncertain position 2017 RIT $300,000 Calculated RIT $210,000 $70K $70K $70K Standard uplift P1 P2 P3

23 Example 3 Uncertain position $310K Actual RIT $590,000 Flexitax $35K $35K $70K $70K $70K $70K Standard uplift P1 P2 P3

24 Benefits Removed exposure to IRD UOMI Maintained flexibility Ability to mitigate UOMI Example 3 Uncertain position Estimating flexibility Standard Uplift shortfall Accrued UOMI* Estimate shortfall Accrued UOMI* P1 $35,000 $2,637 $126,667 $9,544 P2 $35,000 $1,558 $126,667 $5,640 Working capital P3 $310,000 $6,371 $126,666 $2,603 $10,566 $17,787 * Assuming tax settled 4 months after balance date

25 Options for paying provisional tax

26 Tax pooling overlay Pooling allows you to have the best of both worlds Paying tax through the pool gives you the protection of Standard Uplift, but You need only pay an Estimated liability at P1 and P2, adjusting on return completion by purchasing or selling tax through the pool

27 Tax Pooling Overlay Never use the Estimate method Stay on default Standard Uplift method Pay what you think you will owe at P1 and P2 Once liability known, purchase enough tax to meet the lesser of:» Standard Uplift liability; or» A third of your actual liability

28 Cash flow management Pay your tax when IRD tells you? Or Pay your tax when it suits you!

29 Cash flow management: Tax Finance Upcoming tax payment due Defer payment to a time that suits Cost = 3 months interest Rates from less than 4% P2 P3

30 Tax Finance example No IRD interest accrued during the year Pay $105K at each prov. payment $300K RIT P1 P2 P3 Last year

31 4 reasons clients use Tax Finance Cash flow management Keep headroom in banking facility Interest rate No security required

32 Tax Purchase - Flexitax Launched in October 2015 A significant share of all Tax Purchase transactions are now Flexitax No amount too big or too small

33 Tax Purchase - Flexitax Enter Tax Purchase - client can then pay what they want, when they want Chip away at Tax Purchase until paid up until 75 days after terminal tax Statement issued each month to show progress and interest costs

34 Using Flexitax instead of Tax Deposit Use Flexitax to plan the year ahead, instead of doing individual Tax Deposit instalments If the taxpayer pays late we will automatically attribute it to the correct provisional tax date Tax can still be held in pool if required, but will otherwise be paid on the correct provisional tax date to IRD

35 Benefits of managing clients through Flexitax Pay what you want, when you want Provisional tax reminders Proactive education of clients on pooling don t leave it till it s too late

36 Cash flow planning It is important to train your clients on how best to manage provisional tax cash flow If your client has a revolving credit, overdraft, debt or is mortgaging personal assets to support a business they should be using Flexitax (or Tax Finance) Tax Finance and Flexitax require no pre-approvals, will not impact banking covenants, and provide a low-cost alternative to other funding sources

37 Depositing into the tax pool

38 Depositing Tax: IRD v Pooling Tax Pooling Benefits: Depositing tax directly with IRD Depositing tax directly with TMNZ Ability to PURCHASE or FINANCE tax Yes Yes Ability to earn interest on surplus tax No/IRD rate IRD/Premium rate Ability to offer fast refunds 3 5 days No Yes Line of credit against tax paid No Yes Consider depositing for taxpayers paying $300,000+ per annum

39 Reassessments

40 Using Flexitax to settle reassessments Remember that you can use pooling to settle reassessed amounts of tax Available for audits or voluntary disclosures Applies to most tax types (Income Tax, GST, PAYE, RWT, NRWT )

41 Summary points

42 Summary New rules result in improved business environment Pooling improves the position even more, by: Retaining working capital Optimising cash position Delivering optionality and flexibility on when and how much you pay

43 Thank you Chris Cunniffe / Chief Executive Officer James Stuart / Client Relationship Manager