Change seems to be the only constant in today’s volatile markets, but smart tax planning can give Kiwi businesses the boost they need to ride it out.
With economic pressures mounting, tax pooling gives business leaders room to breathe – and act – at a time when agility matters most.
Matt Edwards, CEO of Tax Management New Zealand (TMNZ), says the hard deadlines set for provisional tax payments by Inland Revenue just don’t suit many New Zealand companies with seasonal or variable income, or that want or need to reinvest hard-earned capital back into their business. That’s where tax pooling – essentially where a company like TMNZ pays tax to the IRD on behalf of a client, to enable that client to pay it back to TMNZ either over time or in a lump sum – can even out the ups and downs, helping Kiwi businesses to grow and succeed.
Edwards says companies need to think about their tax obligations as part of their cashflow planning, working out the most convenient times to make payments and freeing up capital for investment in business growth or to take advantage of investment opportunities.
“A lot of the businesses we work with see paying tax as something off to the side – ‘I have to pay my tax at this time’, or ‘I’m not going to pay it because I don’t have the money right now’. But the truth is, with income tax in particular, utilising tax pooling means you can have the flexibility to effectively pay your tax when you want, how you want,” he says.
Rather than treating tax as a fixed outflow, businesses can now fold tax planning into their broader cashflow and growth strategies – freeing up capital to act, not just react.
“That might seem a bit at odds with how most people think of paying tax, and you can’t offset tax forever, but it can smooth the process and enable you not to have to pay until a more convenient point in the future – delaying your provisional tax payments by up to 22 months if you wish.”
Edwards uses the example of a manufacturing business which gets the opportunity to export a particularly large quantity of its product, but doesn’t currently have the capacity to manufacture at that level.
“It’s an interesting place to find yourself – a massive deal on the table that could supercharge your business if you can fulfil it,” Edwards says. “You might need more plant, space, material components or inventory, people or tech – all of which costs money. And if it lands alongside a GST or provisional tax payment, that cash is flowing out of the business too.”
Edwards says many business owners would choose to make the tax payment, maintaining compliance with Inland Revenue, then borrow to grow the business – at bank or business lending rates.
“Let’s say you’re going to pay 15% in interest on that money you borrow to invest in the business. But if you use the cash you have on hand to pay for that investment, and finance your tax payment, to pay at a later date, you could expect your cost of funds to be less than half.”
Edwards says banks don’t like to lend money to pay tax, so business owners typically struggle to borrow money on the open market for this purpose. Also, unlike arranging bank lending, financing tax payments through TMNZ is quick and easy.
“You can set it up without credit checks or security. There are no long contracts, no need for lawyers or advisers – you or your accountant can sort it in a ten-minute phone call, with an email or online.”
While Edwards uses a manufacturing example, he says there are many different types of Kiwi business with variable cashflow which can benefit from tax pooling.
“Almost anything involving agriculture or horticulture is going to be seasonal, but there are other business models where cashflow is variable. Companies which are importing goods are going to have periods when a lot of capital is tied up in stock, and times when lots of products are being sold,” he says. “Almost all businesses have variation in cashflow over a 12-month period, and the current provisional tax framework is not able to cater for all of the many and varied business models out there.”
Edwards notes that while it’s best to organise tax financing before a payment is due, TMNZ’s tax-pooling arrangement with Inland Revenue can also help if you are behind on your tax obligations.
“If you had tax due that you didn’t pay because you have been investing in your business, you can ‘buy back-dated tax’ from us,” he says. The company holds a pool of funds with Inland Revenue on just about every tax due date going back to 2009. Clients can effectively ‘buy’ these pre-paid tax credits, then pay the obligation off over time for their current tax year, or for earlier years if they have a reassessment from IRD (e.g. from an audit).
“Fundamentally, TMNZ is providing you with an easy way to stay compliant, and it’s far better to stay compliant than it is to get your account flagged as a late or non-compliant taxpayer,” Edwards says. “Even if the savings you’re making aren’t particularly large in monetary terms, that compliance aspect is very significant.”
He says it’s also worth noting that tax pooling is an Inland Revenue-approved regime – there’s no hidden tricks about it. “It’s something that Inland Revenue and the Government provides through legislation, rather than being some kind of funding facility on the private market. Businesses can have confidence in its legitimacy, and that Inland Revenue understands how it works.”
In fact, when you sign up with TMNZ and set up a payment arrangement, IRD will put a flag on your IRD account so you don’t get chased for late payments, because they know you are using TMNZ to sort out your payment obligations to remain compliant.
Find out more about TMNZ’s smart tax solutions, here.