One date on the tax calendar seems to be more problematic than the others: 15 January. Businesses with a 31 March balance date know this too well, for this is when Inland Revenue (IRD) awaits payment of GST and their second instalment of provisional tax for their income year. If they were asked what it is about paying tax on this date that is so problematic, they would no doubt give the same, one-word answer: Timing. Indeed, cashflow difficulties can arise in the lead-up to 15 January given the early Christmas-New Year period represents a four-week break from business as usual. Things tend to slow down during this period as Kiwis enjoy the sun, beach and barbecues. COVID-19 may also exacerbate this situation for those operating in sectors that have been highly impacted by the pandemic. That’s why it’s important to be prepared and have a plan, otherwise you will come unstuck… badly. The tips below will go some way to helping you get your cashflow in order so you can have some peace of mind during your holiday break, rather than worrying about your tax.
Figure out what you need
This is important if it’s going to be several weeks before you return to business as normal. A cashflow forecast and budget will help you determine what you need to cover your bases, and identify any potential problems before they become, well, problems. Now is also a good time to review your provisional tax payment with your accountant, especially if your expectations around profitability for the 2020-21 income year are now lower than initially forecast. Tax can mean a major outlay for businesses and there’s no point paying any more than you need to.
Chase outstanding payments
The baby that cries the loudest gets the milk. That’s something to remember when it comes to following up those customers who have yet to settle their accounts. In the event they are experiencing cashflow difficulties of their own, see if they can pay some their bill now. Some money always trumps no money.
On the flipside, invoices for December and January should be sent well before Christmas. You should also ask customers who are closing over the holiday period to pay you before they wind down for the year. Again, if they’re having cashflow difficulties, see if they can pay part of what they owe you. Every little bit helps.
Engage with IRD
IRD is recognising that some businesses have more pressing concerns right now than paying tax and is willing to accommodate. It has the power to waive the interest it charges – this is currently seven percent – as part of an instalment arrangement if you can demonstrate you are unable to pay tax on time due to COVID-19. You will need to be proactive and contact them as soon as possible. Have some financial information readily available as you may need to supply this as part of the application process. Any remission of interest is discretionary and will be decided on a case-by-case basis. And remember, this is not a holiday from paying tax. Should IRD accept your request for assistance, you will be expected to pay the tax you owe as soon as practicable. You will also need to contact IRD to re-negotiate the terms of the arrangement if your situation changes.
Consider tax pooling
Another option is to enter a payment plan with an approved tax pooling provider such as Tax Management NZ. This lets you choose how or when you pay your 15 January provisional tax, without facing IRD interest and late payment penalties. You would have up to 17 months to pay. Acceptance is guaranteed. No financial information or security is needed. You have the option of deferring the full provisional tax payment to a future date of your choosing or paying what you owe in instalments. There is some interest payable, but this is much cheaper than what IRD charges if it does not grant your request for remission. That cost may be a negligible cost given the certainty tax pooling offers in what is currently an uncertain environment.
Touch base with your accountant
As always, please contact us if you have any concerns or questions relating to your cashflow or 15 January tax obligations. We’re happy to work with you to come up with a plan that enables you to survive IRD’s one-two tax punch.