In our last article (Indian Newslink, October 1), we explained the importance of cash flow and how ‘Cash is King.’ This is also true for the Government, which must ensure that it collects all revenue owed by taxpayers to ensure funding to essential services such as education, health, law and order and so on.
In tough economic times, it becomes more difficult for Inland Revenue Department (IRD) to collect the taxes owed. The Government recently increased funding for the Department to chase outstanding returns and debts. For people who are struggling with their cash flow they often unwisely choose not to file or pay their taxes on time. However, legislation gives IRD the ability to levy a range of charges to incentivise payment.
The penalties
The main charges employed are late filing penalties, late payment penalties and use of money interest, which quickly add up to a costly form of finance (late penalties are charged at a rate of 4% of the tax owing the day after the due date, then 1% seven days later and 1% for every month following the due date). Late payment penalties charged cumulatively mount.
Recent Changes
Effective October 1, 2014, IRD changed its rules relating to filing and payment of returns. The significant change is that the Department now requires you to send your return to reach the Department by the due date. Previously you could post your return on the due date and IRD would accept it as received on time. IRD recommends that you now post your returns three working days before the due date for taxpayers in urban areas and five working days for those in rural areas. We suggest that you allow five working days to ensure that your returns are not delayed. In addition, Westpac will no longer accept returns or cheque payments on behalf of IRD. Payments made at Westpac must be either by cash, credit card or Eftpos to eliminate any inequity previously gained from paying by cheque on the due date. We recommend that wherever possible you file and pay your returns electronically to avoid missing deadlines.
Late Filing Fees
The most important thing that you can do is ensure that you always file your returns on time even if you do not have the money to pay the tax, as this will help you avoid the late filing penalty, which ranges from $50 to $250 depending on your turnover or the GST method you use. IRD realises that there is the occasional genuine reason for a late return. If you are late with a PAYE or GST return but have filed every return on time over the previous 12 months, IRD will send you a letter about a grace period. Provided you file the return before the date mentioned on the letter, you will not be charged late filing fee.
Instalment Arrangement
IRD understands that you may not always have enough funds to pay your tax on the due date, but they want to know when you would pay the outstanding tax. If you cannot pay your tax, you can either phone your tax agent or IRD and set up an instalment arrangement. The benefits of such an arrangement are that you will not be charged late payment penalties from the date you have agreed to a plan. You will only be charged interest.
However, be aware that IRD will not enter into a plan until your return has been filed and assessed. Therefore, you need to file your return several days before the due date so it can be processed allowing you to enter into an agreement before the due date or you will be charged at least the first late payment penalty (4%).
You must ensure that you can service any agreement you enter into because if you miss a payment, the arrangement would be void and all penalties will be reinstated. If you cannot make a payment on the instalment plan, you must call IRD before the payment is due and renegotiate the payment dates and amounts.
Tax Intermediaries
In certain circumstances, Tax Intermediary companies can be used to purchase tax credits at the historical dates on which you have income tax due. This can help you avoid late payment penalties and the interest you pay would be lower than IRD penalties. Some tax intermediaries also provide tax finance services which allow you to buy your tax upfront allowing you to meet your payment obligations and then to pay it off in instalments like a hire purchase agreement.
Your accountant will be able to provide you with more information on these services as specific rules apply.
With careful and proactive planning, you can avoid incurring additional costs from IRD.
DFK Oswin Griffiths Carlton is a firm of chartered accountants providing full range of business advisory and taxation services. Its experienced staff can advise you on all aspects of your business from domestic and international perspective.
Nikki Gower is an Associate Director at DFK Oswin Griffiths Carlton based in Auckland. She can be contacted on phone (09) 3793890. Email: nikki.gower@dfkogc.com DFK Oswin Griffiths Carlton is the Sponsor of the ‘Best Businesswoman of the Year’ category of the Indian Newslink Indian Business Awards 2014
