From 1 April 2019 Inland Revenue has introduced new tax rules regarding charging of use-of-money interest (UOMI) on Provisional Taxes paid by taxpayers using the Standard Provisional Tax option.
Previous Rules
- A taxpayer who used the standard option to calculate their Provisional Tax and whose Residual Income Tax (RIT) was less than $50,000, would only be subject to UOMI from their Terminal Tax due date (generally 7 April).
- If a Provisional Tax instalment was paid late and a little extra was paid to cover penalties and interest, the taxpayer was not penalised any further.
- In addition, the taxpayer’s Provisional Tax for that year continued to be under the safe-harbour.
New Rules
- From 1 April 2018, safe-harbour applies to all taxpayers who use the Standard option to calculate their Provisional Tax and whose RIT is less than $60,000
- However, if a Provisional Tax instalment is paid late or is less than the required amount, the taxpayer will no longer qualify for safe-harbour.
- This means that the taxpayer could be subject to UOMI from the date of each late paid Provisional Tax payment.
The interest will be calculated on the lessor of:
- The provisional tax payment due, or;
- The taxpayer’s RIT divided by the number of instalments due.
Interest will continue to be charged until the Terminal Tax (RIT less provisional tax paid) has been paid.
These new rules mean that taxpayers could face significant UOMI costs for short paid or late paid amounts.
The current use of money interest rate is 8.35%.
Our Recommendation
Given the significant risks, if you find yourself in a position where you are late paying an income tax payment, we would strongly recommend you contact us prior to paying Inland Revenue to discuss your options.
There are options regarding using tax pooling where you can preserve your payment dates and save potential interest and penalties.
