Paying tax on your own terms
Every business owner should read and understand their annual accounts. These are your reports and they tell an important story about your business. Having said that, many business owners don't have a background in accounting and don't have the financial skills they wish they had. The great news is that these skills can be developed and we believe it’s our job to empower you in this area so that you run a better business.
Your tax position is a discussion you should be having with your accountant. I know that seems obvious, but many people don’t. They sign what is required and put the rest away in the bottom drawer only to get a rude shock when the tax notice arrives. If your business is doing well, the notices will keep coming. The bad news is, if you have a standard balance date of 31 March, you’re staring down the barrel of a tax payment – and you might not even know it yet. The first provisional payment for the 2020 tax year is due 28th August 2019.
Tax terms can confuse even the best of us so let me keep it simple. Residual tax is how much tax you have to pay at the end of the year after what has been deducted from source, i.e. PAYE, withholding tax on interest earned or imputations attached to dividends received. These are the things that are taxed before you get your hands on the money. If your residual tax is more than $2,500 for the year, you fall into the provisional tax regime. Think of this as a compulsory tax savings for the upcoming tax year. Add 5% on to your residual tax amount because IRD expect your profit to grow each year, divide it by 3 and these will be your provisional payments due 28th August 2019, 15th January 2020 and 7th May 2020. After balance date passes and you’ve prepared your annual accounts, your tax position is crystallised. Any provisional tax paid is deducted from your residual tax and you’re left with your terminal tax. If you’ve paid too much provisional tax, you’ll get a tax refund. If you haven’t paid enough, you’ll make one further payment of terminal tax due 7th April 2021.
Here comes the tricky bit. Are you aware of your expected tax obligations this financial year, i.e. roughly how much tax you will need to pay? Because tax projections are based on past performance, what if this year is turning out to be significantly different from last year? Have you set funds aside to ensure you can and do make tax payments on time?
Tax payments need to be actively managed to coincide with your business cashflow. There are smarter ways to pay your tax, so you can manage your bank balance, save time and reduce expenses. If you can’t afford to make that tax payment on time, or when it’s all said and done you haven’t paid enough, there are ways around falling victim to expensive IRD use of money interest at 8.35% and horrendous late payment penalties. In contrast, overpayments of tax only attract 0.81% interest so that’s not a sensible option either.
PKF Kerikeri are premium partners with NZs largest tax pooling company. This gives us the ability to save up to 30% on IRD interest. Using tax pooling means you can backdate a tax payment to its original due date eliminating the IRD nasties. It’s not to say there is no cost involved with making tax payments late, but there is a cheaper way than letting it all default to IRD. There are strict rules about when this can be used so contact us today to make a plan for your tax.
We’ve been providing accounting services in the Bay of Islands for over 60 years and being part of the PKF Network gives us access to national and international specialist services. So if you’re looking for Chartered Accountants or Business Advisors, call PKF Kerikeri and talk to our experienced team today!
Article by Jancy Stott
PKF Kerikeri, Director