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Tax Pooling – Improve Your Cash Flow by Paying Your Tax Bill

Now you’re probably thinking that the title of this article is a typing error but yes, you most certainly can improve your cash flow by paying your tax, even before it falls due, by using Tax Pooling. 

In the world of tax, the commencement of Tax Pooling can be likened to the introduction of sliced bread (did you know sliced bread was first sold in 1926?). Tax Pooling works by bringing together over-payers and under-payers of Provisional Tax  in a mutually beneficial way and was introduced by the IRD to reduce taxpayers’ concerns and costs in calculating their Provisional Tax  and the resulting exposure to use-of-money interest (UOMI). Tax pooling is handled by a number of IRD approved Tax Pool Intermediaries.

As the name suggests taxpayers place their Provisional Tax payments in a pool account held at the IRD and amounts in this pool are held on trust by an independent trustee. When it comes time to file the tax return, tax payers who have made payments into the tax pool transfer what they need for themselves from their tax pool deposits and any surplus amounts are then able to be traded with other tax payers. Other tax payers acquire those credits because buying someone else’s surplus Provisional Tax extinguishes their liability to the IRD and does this at a lower cost than the IRD’s UOMI rates.

Having got the technical bits out of the way, how can you use Tax Pooling to your advantage?

You can finance your upcoming tax payments
Taxpayers pay an upfront interest cost and then have up to 12 months to pay off their Provisional Tax. Upon maturity, you pay the principal and the tax payment is credited to your IRD account on the original due dates. Finance from Tax Pooling is a very cost effective option which frees up your cash flow and enjoys a number of advantages:

  1. Pre-approval is guaranteed with no credit checks
  2. No security or guarantees are required
  3. The interest rates are very competitive.

You’ve forgotten to pay your Provisional Tax
As sure as night follows day, you’re going to suffer UOMI and even worse, late payment penalties. Not so with Tax Pooling where, in return for a small charge, you can purchase Provisional Tax paid on the due dates.

You can reduce your UOMI costs for Terminal Tax owing for the current year
Maybe you under-estimated your Provisional Tax, you are no longer a Safe Harbour taxpayer or are paying Provisional Tax for a trust or company and your profits are on the up. In all these cases using Tax Pooling can reduce your UOMI costs and normally eliminate any late payment penalties.

You’ve been audited or wish to make payments to cover voluntary disclosure
Here you can reduce UOMI not just for Income Tax but for GST, RWT, & PAYE as well.

At the Accountancy + Business Advice Centre we’ve used Tax Pooling successfully for a number of clients, so if you’re interested in improving your cash flow call Nick on 0800 ASK NICK or email nick@abac.co.nz.