Cash Flow Crunch

 

 
Many businesses will pay their first instalment of provisional tax for the 2018-19 income year on August 28.
It’s important to settle what’s owed on this date. Inland Revenue (IRD) won’t hesitate in charging steep interest of 8.22 percent and late payment penalties if you don’t pay on time.
Cash flow can be a major obstacle to paying tax. As such, now is a good time to look at money coming in and going out of your business to ensure you can survive.
Ask customers if they can pay early and chase outstanding payments. Conversely, buy time if you owe suppliers money.
The usual stuff aside, what else should you be doing to manage cash flow and tax obligations if short on money?
If paying provisional tax on August 28 will be difficult (or you have a better use for the money), consider using an IRD-approved tax pooling intermediary.
An intermediary offers the flexibility to choose how and when you pay your income tax, without having to worry about late payment penalties. Their interest cost is up to 30 percent cheaper that what IRD charges for unpaid tax.
You can pay what you owe in instalments or defer full payment until later on.
Familiarise yourself with the recent provisional tax changes. Much of the guesswork of old and need to continuously re-estimate your liability throughout the year has been removed.
If you base your payments on how much tax you paid last year (this is called the uplift method), IRD won’t charge interest if your current liability ends up being higher. This is a good outcome if you expect this year to be on par or better than last year.
Be aware of the different options available to calculate provisional tax payments.
The uplift method suits those expecting their profitability to increase. It also suits those wanting certainty around what to pay as the liability is capped at the first two installments.
Those anticipating things to go the other way may wish to estimate their payments. Be warned: You must be certain the prior year’s result isn’t going to be repeated as IRD interest will apply on any underpaid provisional tax. You may also incur a shortfall penalty if IRD deems your estimates are too low.
As always, speak with your accountant. They can help you devise a strategy to manage your provisional tax payments and cash flow.
Chris Cunniffe is the chief executive of New Zealand’s largest tax pooling intermediary, Tax Management NZ, and the former head of the BNZ and Air New Zealand tax teams.