April and May are taxing times for businesses. For tax payers with a 31 March balance date terminal tax for 31 March 2020 was payable 7th April 2021, and the final instalment of provisional tax for 31 March 2021 is payable 7th May 2021.
There is also monthly PAYE payable on 20th April, and 20th May; GST for the period ended 31 March due 7th May; and Fringe Benefit Tax (FBT) levies are due on 31st May for quarterly FBT and annual FBT returns.
Ouch – that’s quite a lot of tax to pay!
Tax bills won’t go away and ignoring them will cost you more money. If you don’t pay the required tax by due date then you’ll incur late payment penalties as well as interest (aka Use Of Money Interest/ UOMI).
Late payment penalties
Late payment penalties are a fine and not tax deductible. They start from the day after the payment due date. Penalties for late payments accumulate quickly as they are calculated in 3 stages:
- 1% penalty on the day after payment due date
- 4% penalty for remaining tax including penalties on 7thday after payment due date
- 1% penalty every month the remaining tax including penalties is unpaid.
If it’s your first late payment in a 2 year period, IRD may give you a grace period before they charge penalties. IRD will tell you if you have a grace period and your new due date. If you do not pay by the new due date, IRD will charge the penalty from the original due date.
Use of Money Interest (UOMI)
IRD may also charge UOMI on provisional tax payments. UOMI is not a penalty, but a finance charge that is tax deductible. IRD may charge interest on late provisional or end of year tax payments, or pay you interest if you overpay your provisional tax. Interest is generally not charged if you under or overpay by $100 or less.
Some taxpayers use AIM or the Ratio method to pay their provisional tax. However, most business taxpayers still use the “standard option”.
Under the standard option IRD will only charge or pay you interest from the day after the final instalment date (usually 7 May) if you’ve made your expected payments in full and on time, and your residual income tax is $60,000 or more.
If you’ve paid all but your expected final instalment (usually due 7th May) in full and on time, IRD will charge interest from the final instalment due date (7th May). This allows you to make a payment that is different to your final standard instalment calculated on last year’s tax return. Accurate and up to date accounting records allow proactive calculation of tax payable by 7th May, which reduces exposure to UOMI.
IRD currently charge UOMI at 7% pa on underpaid tax. But if you overpay then IRD currently pay you interest at 0%.
If cashflow is tight what can you do?
First talk to your accountant! Consider if you can borrow at a lower interest rate to pay your tax.
Tax pooling intermediaries allow retrospective purchase of tax payments which can eliminate late payment penalties, and also reduce interest charges.
Alternatively, you may be able to negotiate an instalment arrangement with IRD to pay the tax owing. Once the core tax and interest is paid IRD may remit the late payment penalties.
If you have paid tax late which included interest and penalties, then you can request remission of the interest and penalties if your income has been affected by COVID-19. This remission is available for all tax types except student loan and child support payments. We recommend that you talk to Q2 Ltd or your accountant.
We are currently in the most taxing of time of the year. If you have limited cashflow then talk to Q2 Ltd or your chartered accountant about your options.
“The hardest thing in the world to understand is the income tax.”