Provisional tax improvements

Atul Mehta from Moore Stephens Markhams Chartered Accountants discusses how new legislation enacted in February substantially simplifies obligations under the provisional tax regime. Download full article in Contact magazine July 2017 here.

Most taxpayers pay their provisional tax three times throughout the course of their financial year. Taxpayers with a March balance date for example will pay their provisional tax on 28 August, 15 January and 7 May each year. The ‘standard uplift’ method determines a person’s liability based on a prior year’s tax payable (105 percent for last year, or 110% for previous). The problem is that if a person’s final liability is more than the estimate; Inland Revenue will charge use-of-money interest (UOMI) on the difference (currently 8.27 percent).

This is a source of frustration as taxpayers are either rewarded for having a great year by being charged interest by IRD, or they have to scrutinise their own tax position as they trade through the year and make increased payments to IRD when they could be focusing on their business.

 

Use-of-money interest (UOMI) improvements

In a positive change, the UOMI rules are being amended from 1 April 2017 to 31 March 2018 income year. UOMI will no longer be charged from the first two provisional tax dates on the difference between a person’s ‘standard uplift’ liability and their actual liability based on their completed tax return.

In order to defer the start of the interest charge the taxpayer must meet the minimum payment obligations under the standard uplift method on the first two instalment dates. Where the taxpayer does not make the required payments, UOMI will apply on the first two instalment dates based on the lower of the difference between: the amount due under standard uplift and the actual payment; or one-third of the residual income tax liability for the year and the actual payment.

To be eligible for the concession, companies within a group will all be required to use either the standard uplift or GST ratio method for calculating provisional tax. This rule is designed to prevent related entities manipulating the differences between the standard uplift and estimation methods to reduce exposure to UOMI.

 

Income levels for UOMI increased, widened

In a similarly positive change, the existing concession, which defers UOMI for individuals with a tax liability of less than $50,000 to their terminal tax date (typically the following 7 February or 7 April), is being increased and widened.

From 1 April 2017 to 31 March 2018 income year, the concession is being increased to $60,000 and extended to all types of taxpayers, such as companies.

As with the first change above, there are requirements that need to be met in order for the concession to apply, such as meeting obligations under the standard uplift method. IRD expects that the change to the safe harbour threshold will eliminate UOMI charges for approximately 67,000 taxpayers, at least 63,000 of these being non-individuals who did not previously qualify for the concession.

 

Late penalty less punitive

Finally, the late penalty regime is also changing. Currently, a 1 percent late payment penalty is charged the day after tax is due, a further 4 percent penalty is charged at the end of the first week and a 1 percent incremental late payment penalty is charged each month thereafter. For most taxpayers, the incremental 1 percent monthly penalty will no longer be charged on GST periods starting from 1 April 2017 or income tax and working for families’ debts relating to 1 April 2017 to 31 March 2018, or later years.

SUMMARY
UOMI will no longer be charged from the first two provisional tax dates on the difference between a person’s ‘standard uplift’ liability and their actual liability based on their completed tax return.
From 1 April 2017 to 31 March 2018 income year, the UOMI concession is being increased to $60,000 and extended to all types of taxpayers.
The late penalty regime is also changing.

If you have any queries regarding tax please get in touch with a Moore Stephens Markhams advisor, we would be pleased to speak with you.

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