Estimating how much tax you’ll need to pay can be difficult. Get it wrong and you could be up for IRD interest and penalties. Overpay and you can end up putting too much pressure on your cash flow.
The fix for many businesses is something called Tax Pooling.
More and more businesses are using it to maximise flexibility and cash flow control. In this blog we will cover what tax pooling is and the benefits it can provide your business.
What is tax pooling?
Established by Inland Revenue in 2003 to help people smooth their tax, Tax Pooling fundamentally changes how you pay your tax.
Instead of paying your tax to the IRD, you pay the tax into a “Tax Pool”. There, the money sits with the Public Trust (depending on which Pool you use). We then use the money with the Public Trust to pay any tax bills with the IRD.
Think of it (almost) as a separate savings account which your tax money sits in. Then, once your final, exact, tax bill is known, we transfer the money from the savings account across to the IRD.
Six reasons to use Tax Pooling
1. It’s better than using your personal savings account
If your tax savings sit in your personal savings account, the IRD don’t have the money. So, even though you have the money aside, the IRD will charge interest for late payment if you underpay. For example, if you know your profit increases $30,000 and you put an extra $10,000 aside for the IRD, then they will still charge interest (in some cases) because they don’t have the money — instead it’s sitting in your savings account. With Tax Pooling, you get ‘credit’ with the IRD as soon as you pay it across to Tax Pooling.
2. Get away from provisional tax
No one really likes paying provisional tax. The lumpy nature of provisional tax hits your cash flow, often at the most inopportune time (for example over the Christmas break — Merry Christmas, thanks IRD). Tax Pooling lets you pay tax whenever it suits your business. For us, we prefer to pay tax monthly simply to get it over and done with in smaller chunks throughout the year.
3. Take a break from paying
If your anything like us, there will be some seasonality in your business. To help us get through our quiet season, we skip two of our monthly tax payments (in December and January). We’ve never got any cash then so it’s a lifesaver in terms of managing cash flow. Tax Pooling gives total flexibility for what you pay and when you pay it.
4. Get the money back
If things change in your business then you can get the money back from the pool no questions asked. So, if you have a downturn in your business then the savings in the Tax Pool could be a lifeline. Or, if you need cash to reinvest in new plant and equipment then the Tax Pool could have it covered. The IRD don’t like giving money away, so getting it back from Tax Pooling is much simpler.
5. Cheap funding
If you know in advance that you won’t make a Tax Payment for a period of time, then Tax Pooling could be the cheapest source of funding you’ll ever come across. Their rates are as low as 2% to 3% if you know in advance that you won’t be able to make payments into the Tax Pool.
6. Take the heat out of surprises
Occasionally all businesses get landed with a tax surprise. Often this comes from unexpected increases in profit, or expected increases which never get discussed with your accountant. Tax Pooling can help. If you end up with a tax bill you can’t pay, they can put a repayment arrangement in place with interest rates 2% to 3% cheaper than the IRD (around 6% in many cases). There’s no questions asked by them, and no difficult conversations with the IRD.
Some Frequently Asked Questions
Is it safe?
Yes! All your money is held by the Public Trust, so the business running the Tax Pooling can’t touch your money.
Is it legal?
Yes! Specific legislation has gone through Parliament to allow for Tax Pooling.
Do you use it?
Yes! Our business has the same cash flow challenges as any other business so we use it ourselves the same way we get our customers to use it.
Are there any fees?
No, not from Tax Pooling. Yes, though there is from our end in terms of managing the Tax Pooling arrangement (for most people between $500 and $1,000 per annum). We believe though that these are more than compensated for with the additional flexibility from Tax Pooling.
How does the Tax Pool make money?
In short, the IRD rip people off with their interest rates — they’ll charge you 8% but only pay you 1% if you overpay them. In broad terms, the Tax Pool will charge you 6% if you underpay, pay you 3% if you overpay, and keep the difference for themselves. In short, they make sure everyone wins because of the significant difference in the IRD’s interest rates (the 8% and 1%).
How do I setup Tax Pooling for my business?
If you’d like to find out more about setting up Tax Pooling for your business then get in touch. We’re happy to talk you through the options in more detail, and let you know exactly what the costs and options are to better manage your tax.