Provisional taxpayers don’t always know how much their tax liability will be for the year and therefore how much provisional tax to pay. If they get the calculation wrong, they are subject to two-way use-of-money interest on the under-payment or over-payment of their tax liability.
Provisional tax pooling was introduced in April 2003 and allows compliant taxpayers to reduce their exposure to use-of-money interest on under-payments as a result of uncertainty about their provisional tax payments by purchasing funds from, or depositing funds with, a tax pooling intermediary.
Tax pooling generally involves a taxpayer depositing money with a tax pooling intermediary. The deposit earns interest. The intermediary deposits that money in their pooling account with Inland Revenue. The taxpayer may use the funds (deposit) in the future to pay outstanding tax liabilities or sell the funds to the tax pooling intermediary. If the taxpayer sells the funds to the intermediary, the intermediary can sell the funds to another taxpayer for a fee. On payment of the fee, the intermediary transfers the funds to the other taxpayer’s income tax account as at the date that the money was deposited with the intermediary (usually this will coincide with the provisional tax due dates). Tax pooling enables provisional taxpayers to access money at lower interest rates than if they failed to pay provisional tax on the due date and were subject to use-of-money interest. It also enables taxpayers who have overpaid their tax to get a higher return, from selling the funds, than they would receive from Inland Revenue.
The fundamental principle on which tax pooling is based is the reduction of interest in situations where the taxpayer is uncertain of the amount they are required to pay on the due date. If there is certainty of liability on the due date, the taxpayer is required to pay that amount and tax pooling is not available.
There are other instances, apart from provisional tax, where a taxpayer is uncertain of their tax liability, namely additional tax payable as a result of a reassessment or a dispute with Inland Revenue. The bill introduces changes which extend the tax pooling regime to additional tax payable as a result of a reassessment (including voluntary disclosures and the resolution of a dispute) for all tax types.
Seven submissions were received on the proposed amendments. Most submissions were generally supportive of the changes, with some concerns raised over the resolution of tax disputes.