Penalties can be charged on income tax, GST, PAYE, and other tax types, except Student Loans. You risk paying penalties when:
- Your returns are filed late
- Tax payments are not paid in full
- Tax payments are paid late
Penalties paid to the IRD cannot be claimed as business expenses.
The IRD can charge interest if you don’t make payments on time, and on any underpaid amounts. This interest is tax-deductible.
Interest on income tax
The IRD makes a distinction between taxpayers who have Residual Income Tax (RIT)* of less than $60,000 and those with RIT higher than $60,000.
You will not be charged interest in the following circumstances:
- All tax payments are made in full and on time, and
- Your total tax for the year is below $60,000, and
- If, using the Accounting Income Method (AIM), you have taken reasonable care that the figures on your AIM return are accurate
Interest may be charged in any the following circumstances:
- Late or underpaid tax (including provisional tax)
- Your total tax for the year exceeds $60,000
- You have chosen to estimate your income tax and it has been incorrectly calculated
- You have not taken reasonable care that the figures on your AIM return are accurate
* RIT is your total tax bill, less any taxes withheld along the way – this can include PAYE, dividend imputation credits, and Resident Withholding Tax on interest and dividends.
A common and hopeful plea we hear is “can you get the IRD to reverse interest and penalties?”
The IRD charges interest because you have used them like a bank. Paying tax may bring you into a bank overdraft, increase your overdraft, or force you to get a loan. All of these incur interest, usually at high rates. You therefore pay interest to the IRD, rather than to your bank.
Most of the time, the IRD will not reverse or reduce interest charges. An exception could be where a recent refund is applied against a previous tax charge. Confused?
- Your tax payment of $8,000 for the 2019 year was not made by the deadline of 7 April 2020. The IRD started charging interest from 8 April 2020.
- You file your 2020 return in December 2020 and it’s a refund of $9,500. You are legally entitled to that refund on 1 April 2020.
- We transfer your 2020 refund to the 2019 year and voila! The tax you had to pay by 7 April 2020 has now been paid via your refund!
- The IRD reverses the interest (and late payment penalties).
Penalties are difficult to get remitted.
If it’s your first time with a late payment or late filing, the IRD may give you a grace period and a little more time before they penalise you, or they may issue the penalty and reverse later upon request. They’ll send you a letter stating this.
The IRD has little patience and sympathy with consistently late taxpayers and asking is usually a lost cause. If there’s a good reason, they’ll consider it, but only once the core tax has been paid in full. This was particularly the case with the impact of Covid, but as more and more businesses are getting back to normal, it’s not a given.
You can stop the late payment penalties if the IRD agrees to an instalment arrangement. They’ll still charge interest though.
We can apply for an instalment arrangement on behalf of our Beany clients.
If your business has late-paying customers, you become frustrated and try to resolve the problem. Options include requiring a deposit up-front and/or charging interest and penalties. Many businesses prepare a cashflow forecast, which generally assumes customers pay on time. If they don’t, the month-end cash position is lower than expected. This impacts overdraft interest, and makes you think twice about purchasing that new piece of equipment.
Inland Revenue is in a similar position. We’re its customers. It has forecasts with income (from taxpayers) and expenses (various government departments – social housing, health care, schooling, etc).
The short answer as to why Inland Revenue charges interest and penalties – it’s a business.
Beany doesn’t work for Inland Revenue – we work for you. We use our best experience, judgement and training to interpret accounting and tax legislation to enable you, the taxpayer, to pay the least amount of tax legally possible.