Changes made to the provisional tax rules in recent years have made some aspects easier to manage but have also introduced some complexities that we did not have before. The key message in this article is to touch base with us if you accidently missed a provisional tax payment as paying IRD late can have significant implications and there are other options available to mitigate these.
On one hand, the new rules are easier to manage in that they allow you to pay the default instalments with IRD interest only being charged from the last instalment date. With this ability, we typically recommend paying the default instalments at the first two instalment dates with a review and top up voluntary payment at the last instalment, if needed.
On the other hand, if any payment is made late, even by just one day, you fall outside the above safe harbour rules and interest applies from each instalment date as if you should have paid the total tax in three equal instalments. For those familiar with the old rules, this is effectively like filing an estimate at any point in the year which exposed you to interest from the first instalment date. This is particularly tricky for clients with income that varies from year to year.
An alternative to paying IRD late and being exposed to interest for the full year, is to purchase the tax via tax pooling. Tax pooling allows you to purchase tax at the original due date with interest payable to the tax pooling company at a rate below the IRD rate. The advantage with this is that interest is paid only from the due date until the payment date. For example, if you pay 5 days late, you will only pay 5 days of interest to tax pooling and from IRD’s point of view they receive the money on the original due date so there are no penalties and interest payable and you remain within the safe harbour provisional tax rules.
In summary, if you forget to make an income tax payment, or are paying after the due date, please touch base with your client manager first as there may be a better option for you than simply paying IRD as soon as you pick up the mistake.