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Accounting 101: Using Tax Pooling for late or underpaid tax

Have you missed your tax payment? Worried about the IRD’s late payment penalties and use of money interest (UOMI) charges?

Then tax purchasing could help you!

New Zealand tax-payers have to pay tax on certain dates, at certain amounts, depending on their income levels.

If they miss a tax payment, the IRD will immediately charge a late payment penalty, and Use of Money Interest which builds daily. After a few months, there could be hundreds, even thousands of dollars of interest and penalties to pay on top of the original amount of tax to pay!

How Tax Pooling Works:

Instead of making provisional tax payments directly to their account at Inland Revenue, some tax-payers instead deposit their tax payments into a tax pooling trust account at IRD, held by a trustee and operated by an Inland Revenue-approved tax intermediary. (At Accounted4, we use Tax Traders Ltd).

Once the actual profit is known at the end of the year, if the tax-payer underpaid their provisional tax they can purchase the shortfall of tax from the tax pool for a lower interest cost than the IRD charge and avoid any IRD penalties. If they have overpaid tax they can sell the tax to other tax-payers, or get it refunded to their bank. You don’t have to be a tax pooler to purchase tax, anyone can do it!

In layman’s terms, some people over-pay their tax at a certain date, and others that have underpaid will “purchase” that over-paid tax back at the date they themselves should have paid. Although there is still some interest to pay, they pay no late payment penalties to the IRD, and a much lower interest rate to the over-payer than what the IRD would charge them (currently 7%). Win win!

The people selling their overpaid tax get a higher interest rate than the IRD would pay them (which is currently 0%!), so they win too!

The IRD miss out getting paid the UOMI and late payment penalties when tax purchasing is used, but they are happy to forego this because it means they are getting paid the right amount of tax at the right time.

The phrase “buying tax” sounds strange, no one likes tax let alone the idea of buying it!

But buying tax really means “buying tax already paid at a certain date in the past, attaching your name to it, and eliminating the interest and penalties that are currently accumulating on your income tax account at the IRD”. Sounds better doesn’t it?!

If you miss your tax payment it’s important you talk to your accountant before you pay the IRD. In most situations you will be better off purchasing tax and not paying the IRD directly. Your accountant will let you know if this is something that is right for you, and will organise this on your behalf, but if you have any further questions please give us a call!  


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