‘Safe harbour’ is a term used by Inland Revenue to determine when a provisional taxpayer becomes subject to use of money interest on income tax.
Safe harbour is available to:
- Provisional taxpayers (including those in the first year of business) with Residual Income Tax (RIT) less than $60,000*, and
- Provisional tax is calculated using the standard uplift method, and
- All payments are made in full and on time
Step outside any of those conditions and all bets are off.
* For taxpayers with RIT higher than $60,000, Inland Revenue offers a safe ‘inlet’. In the best-case scenario for the 2022 tax year which has terminal tax due on 7 April 2023, they’ll only charge interest from 8 May 2022.
Interest is charged because during the period you haven’t been paying tax, you’ve had the use of the money (that’s why they call it ‘use of money’ interest) in the bank to:
- Receive interest income (stop laughing)
- Reduce your bank overdraft (overdraft interest rates can be high)
Inland Revenue’s thought process is that you could have borrowed money or increased your overdraft to pay your taxes. The bank would charge interest – so they do too.
* Inland Revenue has changed the rules for taxpayers having Residual Income Tax of less than $60,000 for the 2023 year onwards. Jump to the relevant section here.
We’re just completed the 2022 tax year, so let’s see if you’ve been in the safe harbour.
Residual Income Tax higher than $60,000
All provisional tax payments are paid in full and on time.
You’re in a safe little inlet, with interest on unpaid terminal tax starting from 8 May 2022.
All other scenarios
- Interest starts being charged on underpayment and late payments from the day after each of the due dates
- 29 August 2021
- 16 January 2022
- 8 May 2022
- Late payment penalties are also imposed from the day after each due date
Residual Income Tax lower than $60,000*
All provisional tax is paid in full and on time
You’re in the safe harbour. Interest would only be charged on unpaid terminal tax, starting from 8 April 2023
The first two provisional tax payments (August and January) are made in full and on time:
- Interest starts on underpaid or late payments from 8 May 2022
- Late payment penalties start from 8 May 2022
Only the first provisional tax has been paid in full and on time
- Interest begins on 16 January 2022…
- …and so do penalties
Provisional tax hasn’t been fully paid on any due dates
- Interest comes into play from 29 August 2021
- Penalties also start on 29 August 2021
Tax pooling (also called tax financing) can definitely help. You deposit money into an account held by an IRD-approved intermediary – this is called the tax pool. Once you have deposited the payments into the tax pool, the intermediary will transfer these funds into your own IRD account as if on the due date.
Of course, this service isn’t free. You’ll pay interest to the intermediary, but the rate is lower than at Inland Revenue.
Even better – Inland Revenue won’t charge any late payment penalties because from their perspective, you’ve paid on time (via tax pooling).
Some people ask if using tax pooling raises red flags at Inland Revenue – it absolutely does not. Tax pooling is used by many businesses and individuals. You can imagine how handy it is for those with seasonal fluctuations – farmers, wedding organisers, tourism industries, cafes, restaurants, and so many more. Instead of paying lump sums out-of-season, they can pay into the tax pool when it suits them.
There are timing restrictions though. Tax pooling cannot be used after 75 days of the terminal tax due date*. For the 2021 tax year, you could have up to mid-June 2022 to make arrangements (if you have Extension of Time).
The two websites below provide you with more information. There are no fees to sign up and you can do it yourself. The only thing you’ll pay is the interest on amounts you use.
* You can make repayment plans with Inland Revenue at any time. In doing this, your late payment penalties will be reduced, and you have peace of mind, knowing that side of the business is under control.
Acknowledge the problem. Talk to your accountant. Enter into a payment plan with Inland Revenue. Get in touch with a tax intermediary.
We know tax can be extremely stressful. There are many options available to help you out – ignoring the problem isn’t one of them. We’ve seen it. We’ve done it. Clients have expressed absolute relief once tax issues are sorted. Not necessarily paid – but sorted. Just knowing there’s a plan to get you up to date, and a system in place to make sure it doesn’t happen in the future, is very empowering!
Those of you in the game for a few years now will be happy to hear that Inland Revenue is going back to its ‘old’ rules on charging interest on provisional tax.
- You will no longer be charged interest on provisional tax payments which are not paid in full or on time…but…you will still be charged late payment penalties.
- Interest will only be charged on amounts unpaid after the terminal tax due date. For those with Extension of Time, this will be April the following year. For those without, it will be July of the same year.
* This applies only to provisional taxpayers with less than $60,000 Residual Income Tax to pay (ie, those in Safe Harbour)