Provisional Tax

June 16th, 2014 at 4:00 pm by David Farrar

Stuff reported:

The much-hated provisional system that forces small businesses to forecast their liability a year in advance will be overhauled, Revenue Minister Todd McClay has all but confirmed.

McClay said he did not believe the provisional tax system was “fit for purpose”.

A “business transformation” programme under way at Inland Revenue, which the department expects to cost up to $1.5 billion, could allow firms to pay tax on their income in, or closer to, real time, he said.

It would be “wonderful” if Inland Revenue could get to a point when income was taxed only when it was earned, but any changes would need to be balanced against the Government’s needs, he said.

John Payne, head of tax for the New Zealand Superannuation Fund and spokesman for the Corporate Taxpayers Group, said reform of provisional tax was certainly needed.

Provisional tax is a pain. My company’s income and profit can vary greatly from one year to the next. I don’t even know what the year end is likely to be until around 9 months into it. So often my provisional tax has been over-paid, or turns out to be inadequate and you risk penalties.

A system where say every four months you just calculate your provisional profit and pay 28% of that with a final adjustment after year end, would be much easier.

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35 Responses to “Provisional Tax”

  1. holysheet (300 comments) says:

    What? you are kidding surely!!

    A system where say every four months you just calculate your provisional profit and pay 28% of that with a final adjustment after year end, would be much easier.

    That is just too simple for them to understand

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  2. nickb (3,675 comments) says:

    A system where say every four months you just calculate your provisional profit and pay 28% of that with a final adjustment after year end, would be much easier.

    Whilst that may be great for larger businesses that prepare quarterly (or even more frequent) management accounts, I don’t think that having to prepare 4-yearly financial statements to calculate profit (i.e. 3 times during year and once at the years’ end) is going to help small businesses who disproportionately bear the burden of a complex tax system.

    I’m a supporter of small businesses having some form of turnover tax. Turnover under $500k, pay 10% tax on turnover which covers income tax, GST, ACC and the rest (excluding PAYE on employee wages) as a final tax. Then IRD could even move to real time tax collection which they are self-servingly agitating for.

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  3. CJPhoto (218 comments) says:

    ‘just calculate your provisional profit’

    So you want us to do 3 provisional tax returns a year plus a final tax return. I dont think that is called simplification.

    The current system is simple. Pay 5% more than last year. If you think it will be more, pay more if you want. If you think it will be less, file an estimate and pay less.

    The changes need to be around making ‘use of money interest’ rates more reasonable and removal of penalties unless IR deems you to be playing the system.

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  4. David Farrar (1,874 comments) says:

    I’m a small business. I generate a monthly profit and loss. Takes 10 seconds to do (thanks Xero). That is ten times easier than trying to estimate mt future profit. One is known – the other is not.

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  5. burt (8,036 comments) says:

    DPF

    If IR was being proactive (Well actually if government legislation is being proactive) they could provide integration that products such as Xero could use to tell you how much your current up to date liability is. This stuff is so simple in technical terms.

    The same sort of deal could be applied to payroll systems, calculate current pay – query IR for “official” tax liability as at that time and calculate tax accordingly. Would decimate the ‘tax refunds’ business – but only a socialist government would protect those businesses to stop people working in them ending up on the dole queue.

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  6. CJPhoto (218 comments) says:

    Sorry – mis-interpreted ‘provisional profit’ for a tax profit number. Basing tax payments on accounting profit would be simple. I still think the issue is more in the interest and penalties than the actual calculation as if those are reasonable, doing an estimate wouldn’t be such a burden.

    The use of tax intermediaries (such as Tax Management New Zealand) for paying tax manages a lot of that risk and is probably under-used by small businesses.

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  7. burt (8,036 comments) says:

    DPF

    One of the key issues is the PAYE schedule has no “start date/end date” for the pay period being filed. Just a start date and end date for the schedule. Think back to what happened when PAYE schedules were introduced and you get an insight into why no government has been prepared to make IR implement this ;-)

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  8. peterwn (3,215 comments) says:

    An easier solution would be to ease back the underpayment interest rate to something more reasonable than the present Shylock rate and possibly increase the ‘overpayment’ rate. In fact set the two rates to give a ‘neutral’ situation from IRD’s point of view ie to give the expected provisional tax cash flow. IRD had a problem several years ago as the ‘overpayment’ interest rate was attractive and IRD was a good safe place to park surplus funds. They lowered the ‘overpayment’ interest rate.

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  9. burt (8,036 comments) says:

    peterwn

    IR didn’t lower it – government did.

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  10. CJPhoto (218 comments) says:

    Burt – IR is being pro-active. In fact they held a 2 day conference last week to discuss such changes, which will be possible as they upgrade their computer system.

    Expect real-time PAYE including two way integration into payroll software to be one of their first cabs of the rank since getting that accurate eliminates the need for individuals to file tax returns (and use those tax refund scams when it goes wrong)

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  11. burt (8,036 comments) says:

    CJPhoto

    With all due respect, real time calculation of up to date personal tax liability (via payroll providers) was something I submitted for consideration when I was consulting there in 2008. Several people said … yeah good idea… That’s how I know about the ‘current’ limitations of the PAYE schedule ;-)

    It’s taken 6 years for that sort of pro-activity to see the light of day.

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  12. CJPhoto (218 comments) says:

    Burt – true. But I think they are starting to show signs and they are seeing the development of a new system as a good catalyst.

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  13. Alan (1,082 comments) says:

    You only pay penalties if you set your own targets and under estimate profit, if you accept the IRD estimate, which iirc is previous year + 5%, then there are no penalties even if you go under.

    I don’t find provisional tax all that bad, I just stick 30% of my GST exclusive earnings away in a savings account each month, there’s always enough there to pay the IRD with a bit left over.

    It’s not a major drama

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  14. Simon (717 comments) says:

    “The much-hated provisional tax system that forces small businesses to forecast their tax liability a year in advance will be overhauled”

    Wank on. THe only meaningful change is reduction in the tax rate.

    Anyway each budget the State announces new money hire tax auditors to go after tax evasion. In reality the extra hiring of tax goons the State undertakes each year is too deal with the increased complexity of the tax system.

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  15. MT_Tinman (3,055 comments) says:

    I do a GST return every 2 months.

    Why not an income return at the same time with a correction at the end of each financial year?

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  16. Muzza M (291 comments) says:

    Although I don’t earn a lot these days (I spend nine months of the year being lazy in the Philippines), I come back to NZ for three months each year so a mate can have holidays while I run his business. I am self employed but do not have to pay provisional tax, each month I work out what I owe and pay voluntary provisional tax. When I leave the country I do not owe IRD anything. My brother scans and emails me my ACC invoice and I pay it online.

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  17. slijmbal (1,224 comments) says:

    So, the options are pay 5% extra than the previous year in order to avoid penalties or get it correct within reasonably tight parameters to avoid various excessive penalties. Never mind paying tax on income you haven’t managed to collect yet. Have a bad debt? Tough – pay up the tax and claim it back next year, assuming you’re still in business.

    Try ringing them up to arrange a payment schedule – unless you can convince them you will fold and they will lose their money then the answer is pay up on time or take the fines/interest.

    Get your GST wrong and overpay – try getting the money back – nope. You can take it off the next payment with an adjustment form.

    In a not so small business it’s easy to get 20-30% variations in income between years. If the year starts badly and you pay too little provisional for the full year result you are still guilty of underpaying and up for interest plus potential penalties.

    If you’re having a bad year one has the choice of
    a) getting it right with one’s magic crystal ball
    b) paying more than the previous years tax by about twice the rate of inflation just when you can’t afford it
    c) underpaying and then getting hit with interest charges and potentially penalty charges

    I know why the IRD does what it does. Some businesses were using the IRD as a cheaper alternative to a bank loan and some businesses were deliberately delaying income by not receiving payment. The solution effectively punishes the rest because of a loophole for the few.

    Admittedly it is improving – we no longer have the vicious 10% fine for paying GST one day late but that’s bit like saying I stopped beating my wife with an axe and now use a stick. The basic position is you are an evil bastard for making money and will be punished for not wearing the correct socks.

    Some of the comments here appear to be from those who have not actually had to deal with the IRD in a small business. Pay tax intermediaries, for instance? Yet another cost! Why? The system should not be complicated or punitive enough to require it.

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  18. CJPhoto (218 comments) says:

    Slijmbal – there is no cost to a tax intermediary.

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  19. slijmbal (1,224 comments) says:

    @CJPhoto – you are kidding – there are fees involved in using a tax intermediary – they just pay more interest if you overpay and charge less interest if you underpay than the IRD.

    Same problem – just not as expensive.

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  20. Dead Earnest (149 comments) says:

    With modern accounting systems this is a no-brainer. I get around the draw backs of the provisional tax system by paying myself variable wages from my company and thus paying PAYE. But even this is a messy system if you could have a system that worked out income tax based on a monthly profit and loss with a terminal correction following the annual accounts, it would be a serious assitance to the cash flow stability of small businesses.

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  21. wreck1080 (3,815 comments) says:

    @alan:::

    THe problem is that provisional tax assumes the same income is earned each month.

    This caused problems with my business in that my earnings fluctuate especially due to the exchange rate and my invoices are sporadically scattered through the year. eg, on occasion I’m required to pay tax on unearned income

    However, the IRD did introduce a system where you can pay tax based on the GST return. This would have suited me perfectly except they said I earned over the schemes maximum earnings threshold . The people in government just don’t know much about business at all.

    I might have to get me a cost job in govt, tired of battling the bureaucrats.

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  22. PaulL (5,983 comments) says:

    Many on here looking at it from a business owner’s viewpoint, which is all well and good. But Inland Revenue also have a duty to the rest of the population to correctly collect tax, and to not become a lender of last resort to companies that can’t get money elsewhere (i.e. to not allow people to underpay their tax at the start of the year hoping to make it up later). That’s actually quite hard to do, particularly if you let people manipulate their provisional profits such that they can manage to pay no tax at the start of the year. There are definitely risks in doing this.

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  23. Alan (1,082 comments) says:

    @wreck1080,

    You make a good point, I suppose in that situation cash flow can be a killer. My own invoicing doesn’t vary much month to month, so I don’t have to consider that.

    Always good to get another perspective on it.

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  24. slijmbal (1,224 comments) says:

    @PaulL not disagreeing in the need for the IRD to collect tax but the tax system is geared to larger companies and has historically been exceedingly punitive against the majority while chasing the few. It’s improving slowly but still the safest way to run any smaller company with more volatile earnings is essentially to give the government a cheap loan of money one would rather use in the business.

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  25. Tauhei Notts (1,651 comments) says:

    The final instalment of provisional tax is not due until about 7th May.
    These new cloud based systems allow on the ball people to catch up by that date and minimise use of money interest.
    Peterwyn at 4.33 was right. The Use of Money interest rates make Shylock look generous.
    I could understand Michael Cullen increasing them. He was a cnut. But National increasing the difference between interest charged and interest paid is disgraceful.

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  26. PaulL (5,983 comments) says:

    @slijmbal: perhaps therefore a good way to handle it, as others have suggested, is to adjust the interest rate charged so it’s not overly punitive, and so that overpayments match underpayments. The problem there is that a company on it’s last legs can then effectively borrow money from the govt at a low interest rate, whereas a company doing well would feel like overpaying the govt and getting, say, 5%, was not particularly fair. In other words, it will be abused by companies on their way out the door, and the taxpayer will end up not getting paid. In other words, it’s not as simple as some make out.

    It would be interesting to know what the total impact to govt accounts would be if we just lived with that situation – or if we abolished provisional tax entirely for those with under $1M per annum to pay in tax. If the total cost isn’t high, perhaps that would be easier?

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  27. burt (8,036 comments) says:

    PaulL

    I would tend to agree abolishing proof tax below a reasonably high threshold would ease compliance for small business. The GST-Prov changes were indeed, as noted above by Wreck1080, have entry criteria which blocks nanny. Why GST-Prov wasn’t extended to sole traders defies all logic. Small operators with variable workloads would be ideally suited to GST-Prov, what is achieved by making these people operate through companies? other than increasing their compliance load, which GST-Prov was trying to reduce.

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  28. slijmbal (1,224 comments) says:

    @PaulL I know the rationale – the point is that the default choice is to always wield an enormous stick on small businesses because of potential rorts. It’s always about excessive punishment rather than finding an alternative mechanism. There are other examples already touched on e.g. paying tax on money you have not received. These are slowly reducing but the current regime was fundamentally in place in 1990. A long time to piss on small business.

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  29. burt (8,036 comments) says:

    What amazes me is that politicians have produced such harsh compliance regimes with intense penalties, yet when THEY are caught dipping into tax payers money all they need to do is pay it back – and some don’t even do that.

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  30. mjw (352 comments) says:

    slijmbal – Tax intermediaries are great. My experience is that the cost is minimal compared to the hassle saved and the peace of mind obtained.

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  31. infused (648 comments) says:

    About fucking time. Seriously. Predict too low, then get penalized? How the hell are you meant to get a head? Was fucking stupid. Whoever bought this in is a fucking moron.

    Sorry, but I’ve put up with that shit for 10 years so far.

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  32. infused (648 comments) says:

    To add to some of the comments here, I don’t think a lot of you have run businesses. Add 5%… ok

    That 5% could be going to my r&d. I’m being held back by tax.

    You only need one fuck up and it’s all over. Some months we can do 150k, some months we can do 35k. You only need to have one bad month and you get screwed.

    The system is a crock.

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  33. slijmbal (1,224 comments) says:

    @mjw – I might look at Tax Intermediaries as it’s got to be cheaper than what I now effectively do which is bank $ with the IRD to avoid costs. I still repeat my point that this should not be necessary.

    The point that such arbitrage works shows how wrong this is.

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  34. mjw (352 comments) says:

    slijmbal – I found Datacom Netpay were the cheapest PAYE intermediary and service has been good. But I don’t use xero, so not sure if they are compatible with them.

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  35. Floyd60 (90 comments) says:

    McClay needs to be careful. New laws tend to create new ways to cheat.

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