A comprehensive guide on tax pooling

Managing business taxes can feel like navigating a maze, especially when you're dealing with provisional tax. Tax pooling is a tool that can make things much easier. It's becoming a go-to solution for New Zealand businesses looking for more flexibility and control over their finances.​

In this guide, we’ll explain what tax pooling is, why businesses should use it, and how it can help you manage your taxes like a pro.​

Before we jump into tax pooling, let's quickly recap provisional tax. Think of it as a way to spread out your income tax payments throughout the year, rather than facing one big bill at the end.​

In New Zealand, provisional tax applies to:​

Provisional tax payments are usually made in three instalments based on the taxpayer's estimated income tax. Keeping track of these deadlines is key. You can find your due dates on the IRD website or if you're a Beany client we let you know when they're due (and send reminders so you don't forget).​

*Residual income tax (RIT) is the tax you owe after all tax credits have been applied, but before any provisional tax prepayments have been considered.​

Tax pooling is a system that adds a layer of flexibility to your provisional tax. It involves a third-party intermediary (e.g. Tax Traders, TMNZ) that acts as a connector between businesses. They bring together businesses that have overpaid their tax with those who need a little extra time or flexibility.​

Here's how it works:​

Let's use an example to illustrate:​

GreenTech, a renewable energy company couldn't pay its $100,000 provisional tax instalment. Instead of panicking, they use tax pooling. GreenTech buys $100,000 in tax credits from the pool who sourced those credits from another business that had overpaid. This allowed GreenTech to meet their tax obligation without penalties from the IRD. Later when their cash flow improves they repay the intermediary along with a small fee.​

Tax pooling can be a real lifesaver in a few common situations:​

In these situations, tax pooling is a smart, practical way to stay on top of your taxes without putting a strain on your finances.​

If you have funds available:​

Deposit provisional tax into the tax pool to enjoy greater control and flexibility.​

If you want complete flexibility:​

Manage cashflow by paying provisional tax as you go in instalments​

If you don't have funds available:​

Delay payment of provisional tax to a date in the future.​

If you're behind on tax:​

Top up if you have missed or underpaid income tax for the year or owe additional tax following a re-assessment from the IRD.​

Once your final tax liability is confirmed, the tax pool will transfer the necessary amount to your IRD account. Your accountant will confirm how much you need and when, ensuring everything is handled smoothly. The IRD will treat these payments as if you've paid them on time, wiping out any interest or late payment penalties on your account.​

If you'd like to know more about how tax pooling works and how it can benefit your business, talk to your accountant. If you're not working with one, Beany is here to help.​