Anyone who has been hit hard by Inland Revenue (IRD) late payment penalties and use of money interest (UOMI) for unpaid or underpaid tax knows how crippling this can be.
It’s the last thing you want to happen.
However, using tax pooling to settle income tax liabilities reduces your exposure to late payment penalties and UOMI, meaning it is cheaper than paying the money directly to IRD
Tax pooling allows you to purchase tax from someone who has overpaid and then apply that tax to meet your liabilities.
As such, you can eliminate IRD late payment penalties and significantly reduce UOMI costs by up to 30%.
When might it work?
If, having just paid your third instalment of provisional tax for the 2014 year, you think you might have underpaid at one of your earlier dates, you can top up at any time with Tax Management NZ (TMNZ) to eliminate late payment penalties and reduce UOMI interest costs.
How tax pooling works
Lord Sparkle Cleaning had a bumper 2014 financial year, with its income tax liability expected to be $300,000.
Because the year was better than expected, the company realises it has underpaid its first two provisional tax payments by $40,000 each.
It purchased the underpaid tax from TMNZ for $83,048. By paying only $3,048 in TMNZ interest, it saved $9,219 in potential IRD late payment penalties and $561 in UOMI.
Contact us if you would like to talk through your tax plan and want to know more about using tax pooling to manage your provisional tax.