Tax made easy

Do you have difficulty keeping up with your tax obligations? By taking a few simple steps to better manage your cash flow, you can ensure you’ll be prepared the next time the taxman comes knocking 

Managing your cash flow throughout the year can be one of the most difficult factors in business success. Just when it appears that you’re getting on top of the cash situation, another tax bill comes along and you’re back to square one.

While tax cannot be avoided; cash flow can be managed with a few simple tips.

Many of our clients find setting up a separate bank account for tax payments a simple solution to avoid being caught out by a bill from the IRD. They put money aside each month for an estimated income tax bill and only dip into the account when provisional or terminal tax dates roll around. Using this method, you should put aside 28% of your monthly taxable income (for simplicity’s sake, your income less expenses).

This can also be useful for any substantial GST payments you may need to make; for example, large one-off transactions that lead to a higher than usual GST bill. In this case, it’s wise to take the 15% of GST received on the large receipt, and keep it aside to cover the payment that is coming down the track.

If you make a loss in a month, don’t withdraw any cash or add to the balance. If the loss situation continues for a few months, it may be time to re-evaluate the amount you’re setting aside.

A similar issue can arise for businesses that suffer from seasonal peaks and troughs – the IRD does not offer a respite for those who are in profit at the end of the year end but haven’t paid tax on provisional tax dates; this places further importance on the strength of your budgets for the full financial year.

If you face these sorts of issues on an annual basis, talk to your accountant about how you can avoid this from happening.

Keep your hands out of the cookie jar!

While this seems relatively simple, it’s absolutely crucial that you do not dip into this account during the year – barring any catastrophic downturns in your business performance. If you do, you’re simply shifting the issue and, if you cannot meet your payment obligations, you‘ll be charged interest and penalties by the IRD.

An upside to using this method, if you use an interest-bearing account, is that you can essentially swap around the situation you face for underpayment!

Tax pooling intermediaries

Another option, usually limited to income tax payments, is to utilise the services of a tax pooling intermediary to finance or top up any underpayments.

The key to tax financing is in its name – you effectively request an amount of tax to be paid to the IRD on your behalf. The finance contract operates as you’d expect, with repayment times and interest rates offered by the provider. The interest is paid as an up-front fee and is the only cost in the arrangement; the full tax amount is then paid at the chosen maturity date.

This allows you to effectively manage your cash flow while paying your tax. Although you are paying interest on the tax payment, you will avoid penalties (as long as you pay the right amount) and the interest is lower than that charged by the IRD.

What happens if I underpay my tax?

In this case, you can apply to the tax pooling intermediary to top up your underpayment to the level that has been assessed by the IRD, in effect ‘purchasing’ the underpaid amount. Similarly to the tax financing option, you end up paying a lower rate of interest to the provider than you would to the IRD. You will also avoid any late payment penalties.

While this is a more reactive measure, it can also be the more realistic option because it’s hard to accurately anticipate your tax payments. Tax purchasing can often lessen the impact of tax during your more successful years, lowering the interest amounts paid by up to 30%. For this reason, if we have any clients with terminal tax payments due, we recommend they use a tax purchaser instead of paying the IRD directly.

As with all tax situations, there is never a simple answer but any of the above options can help you save yourself a bit of grief. More importantly, you can help your business’ cash flow thrive where it has previously faltered.

If you have questions about how to manage your tax payments and cash flow, or have any other questions regarding tax purchasing or financing, please contact Peter van der Heijden at peter.vdh@crowehorwath.co.nz; or contact your local Crowe Horwath advisor.

For the contact details of your local office, please visit: www.crowehorwath.co.nz/locations or phone 0800 494 569.