Safe harbour – income tax

No, it’s not part of the sea sheltered from the elements.​

‘Safe harbour’ is a term used by Inland Revenue to determine when a provisional taxpayer becomes subject to use of money interest on income tax.​

Safe harbour is available to:​

Step outside any of those conditions and all bets are off. ​

* For taxpayers with RIT higher than $60,000, Inland Revenue offers a safe ‘inlet’. In the best-case scenario for the 2022 tax year which has terminal tax due on 7 April 2023, they’ll only charge interest from 8 May 2022​

Interest is charged because during the period you haven’t been paying tax, you’ve had the use of the money (that’s why they call it ‘use of money’ interest) in the bank to:​

Inland Revenue’s thought process is that you could have borrowed money or increased your overdraft to pay your taxes. The bank would charge interest – so they do too.​

When does Inland Revenue charge penalties and interest?​

* Inland Revenue has changed the rules for taxpayers having Residual Income Tax of less than $60,000 for the 2023 year onwards. Jump to the relevant section here.​

We’re just completed the 2022 tax year, so let’s see if you’ve been in the safe harbour.​

All provisional tax payments are paid in full and on time.
You’re in a safe little inlet, with interest on unpaid terminal tax starting from 8 May 2022.​

All other scenarios​

All provisional tax is paid in full and on time
You’re in the safe harbour. Interest would only be charged on unpaid terminal tax, starting from 8 April 2023​

The first two provisional tax payments (August and January) are made in full and on time:​

Only the first provisional tax has been paid in full and on time​

Provisional tax hasn’t been fully paid on any due dates
Ouch.​

Tax pooling (also called tax financing) can definitely help. You deposit money into an account held by an IRD-approved intermediary – this is called the tax pool. Once you have deposited the payments into the tax pool, the intermediary will transfer these funds into your own IRD account as if on the due date.​

Of course, this service isn’t free. You’ll pay interest to the intermediary, but the rate is lower than at Inland Revenue.​

Even better – Inland Revenue won’t charge any late payment penalties because from their perspective, you’ve paid on time (via tax pooling).​

Some people ask if using tax pooling raises red flags at Inland Revenue – it absolutely does not. Tax pooling is used by many businesses and individuals. You can imagine how handy it is for those with seasonal fluctuations – farmers, wedding organisers, tourism industries, cafes, restaurants, and so many more. Instead of paying lump sums out-of-season, they can pay into the tax pool when it suits them.​

There are timing restrictions though. Tax pooling cannot be used after 75 days of the terminal tax due date*. For the 2021 tax year, you could have up to mid-June 2022 to make arrangements (if you have Extension of Time, EOT).​

The two websites below provide you with more information. There are no fees to sign up and you can do it yourself. The only thing you’ll pay is the interest on amounts you use.​

Tax Management New Zealand (TMNZ)
Tax Traders​

* You can make repayment plans with Inland Revenue at any time. In doing this, your late payment penalties will be reduced, and you have peace of mind, knowing that side of the business is under control.​

Acknowledge the problem. Talk to your accountant. Enter into a payment plan with Inland Revenue. Get in touch with a tax intermediary.​

We know tax can be extremely stressful. There are many options available to help you out – ignoring the problem isn’t one of them. We’ve seen it. We’ve done it. Clients have expressed absolute relief once tax issues are sorted. Not necessarily paid – but sorted. Just knowing there’s a plan to get you up to date, and a system in place to make sure it doesn’t happen in the future, is very empowering! ​

(Not) Paying Tax
A guide to income tax for business owners​

Those of you in the game for a few years now will be happy to hear that Inland Revenue is going back to its ‘old’ rules on charging interest on provisional tax.​

* This applies only to provisional taxpayers with less than $60,000 Residual Income Tax to pay (ie, those in Safe Harbour)​

We’re an online accounting firm that is always right here for you, your accounting pain relief. The most advanced technology lets us work way more closely with you than a normal accountant would. ​

We have a dedicated team of remote accountants to take care of your business no matter where you are, so you can focus on growing your business. We take out the ‘fluff’, break down the barriers and get things done. Looking out for you is what we are all about. Get started for free today.  ​