Use of Money Interest and Tax Planning

 

In certain situations, taxpayers may be subject to “use of money interest” if they fail to pay their taxes, pay them late, or underpay. Here’s what you need to know about when use of money interest applies and how to minimise it:


1. When is use of money interest payable to Inland Revenue?


You may be required to pay use of money interest if you:


– Underestimate your provisional tax.
– Earn income that hasn’t been taxed or hasn’t had sufficient tax deductions, resulting in an end-of-year residual tax of $60,000 or more.
– Pay your taxes late.


2. COVID-19 and adverse events impacting provisional tax:


Inland Revenue has the discretion to waive penalties and interest for businesses unable to pay taxes on time due to COVID-19 or other adverse natural events. It’s crucial to still file your returns and communicate your ability to pay or request installment arrangements. You might be eligible for a use of money interest write-off. Contact Inland Revenue for guidance specific to your business.


3. Calculation of use of money interest:


Use of money interest rates are determined by Inland Revenue to discourage taxpayers from using them as a bank. As of May 9, 2023, the rate for paying use of money interest is 10.39%. If you overpay your tax or fall into the aforementioned categories, you receive interest at a rate of 3.53%.


4. Late payment of taxes and interest:


If you fail to pay your taxes on time, you’ll incur use of money interest until the account is clear. Even if you set up a payment arrangement, interest will still be applicable. However, entering into a payment arrangement can often help you avoid further penalties.


5. Provisional taxpayers using the standard uplift method:


Taxpayers using the standard method for calculating and paying provisional tax are not liable for use of money interest on the first two installments. Interest will only apply from the third installment onward. Additionally, if your income tax liability is less than $60,000, use of money interest won’t be charged for any resulting shortfalls on each installment date. However, interest will still be payable if the income tax remains unpaid by the terminal tax date.


6. The GST ratio option:


If you opt for the GST ratio option, you won’t be subject to use of money interest. This option allows you to base your provisional tax payments on a percentage of your GST taxable supplies. It applies to provisional taxpayers who have been GST registered for more than two years, have a residual tax liability under $150,000, and are on a one-monthly or two-monthly GST registration. Partnerships cannot utilise this option.


7. Accounting Income Method (AIM):


With AIM, as long as you make full and timely payments, you won’t be liable for use of money interest. Small businesses with an annual turnover below $5 million and approved accounting software can calculate their provisional tax using AIM, aligned with filing GST returns.


8. Minimising use of money interest:


Regular tax planning is essential to minimise use of money interest. Making voluntary payments of provisional tax as you go can be more cost-effective, utilising your trading bank or a tax pooling intermediary for financing. Reliable accounting software producing management reports will help you monitor your income throughout the year. Consider seeking professional assistance to ensure accurate reports and proactive tax planning.

Remember:


Stay informed about your expected tax obligations in advance, and consider a tax plan prepared by professionals. Inform your tax advisor if there are any changes in your income circumstances, as it may impact provisional tax and interest calculations.


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