In Issues Paper "Making Tax Simpler" April 2016, IRD said in recent years approximately $800 million to $1 billion of uncollectable debt has been written off each year. Wow you might say! However, if you look at that number closer, the debt is made up of actual tax that hasn't been paid, IRD penalties (about 30% of the $ value of debt) and interest that compounds each month on outstanding tax, interest and penalties.
With the current Use of Money Interest underpayment rate of 9.21%, the combined penalty and interest rate is approximately 27% per annum in the first year and just gets bigger. Its little wonder late payment penalties, supposedly designed to encourage taxpayers to pay tax on time, have caused people to become so overwhelmed they just give up.
The Credit Contracts and Consumer Finance Act, apart from requiring a financier to disclose the total finance cost to the consumer, also has a clause "A consumer credit contract mustn't provide for a credit fee or default fee that's unreasonable".
Perhaps the Government took some notice of this in the latest Taxation Bill which proposes to remove the 1% monthly incremental late payment fee on unpaid GST, Income Tax and WFF tax credits overpaid from 1 April 2017. However, they're not going to do away with penalties altogether, the initial late payment penalty of 1% one day after payment is due and 4% seven days thereafter, will still be there along with interest.
In my mind, paying tax on time is just as important as it always has been. I don't believe the continued charge of interest without the added late payment penalty is going to make it any less overwhelming for the embattled taxpayer.
I've used Tax Management NZ to help a lot of people overcome the cost of late payment penalties. The interest rate charged by the "Tax Pooler" is just over half of what IRD charge and it offers a number of options for clients to pay. And that's a good thing when cashflow is tight.
In my experience with business clients, the two worst times are January and April/May. Over the Christmas/New Year, a business closes, pays a whole lot of holiday pay and within a week of reopening (before any money has been made or collected) there's provisional tax, PAYE and GST. By April/May, the business pulse has returned to an even tempo and along comes tax for the previous financial year, final provisional tax for the forthcoming financial year and in between those are PAYE and GST. And by the way Easter is late this year, in April not March.
For many clients, I also suggest using the "GST Ratio" method. For those business taxpayers interested, they'll need to apply before 31 March 2017 for it to take effect from the start of the financial year. When a business files and pays GST, they also pay provisional tax based on an IRD pre-determined percentage of Gross Sale Revenue returned in the GST return. As long as these are paid by the due date, IRD cannot impose late payment penalties if it later works out the business has short paid tax. This works a treat for businesses that have a rollercoaster ride when it comes to profit or are in growing and it also means GST and provisional tax are paid when cash is available.
Later on I'll be writing about another method that's likely to be on offer, but in the meantime Tax Pooling and the GST Ratio method are something businesses should be aware of and use.