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Accumulus Newsletter - January 2020                                                                                                                                                                                               

GREETINGS

The team at Accumulus wish all our clients a happy healthy and prosperous New Year.


PROVISIONAL TAX

Taxpayers need to be absolutely sure that they make tax payments on time and for exactly the correct amount (or more) if they wish to qualify for the "safe harbour" provisions.

"safe harbour" means that if you stick to the standard calculation of provisional tax based on your most recent filed tax year the IRD will not charge you interest and penalties for underpaying provisional tax if the year turns out to be a much better year than the year the calculations are based on.

The present IRD application of the law is patently unreasonable and harsh for the taxpayer. They are deeming:

-       an underpayment of a provisional tax instalment by as little as 50 cents or 

-       a late payment by one day,

to be the taxpayer estimating their tax and electing out of the safe harbour provisions – patently ridiculous!

If the taxable income for the year is less than the previous year this may give rise to no significant problem but if income has swung upwards over the last two years the effects can be financially penal.

Hopefully the IRD will change their attitude or the law will be changed, but for now the important thing is to ensure that provisional tax is paid for the full amount by the due date.

(Appendix 2.) has been attached at the end of this newsletter for anyone that wants to try and work their way through an example.



MYIR

Since 1 April 2018 ie for the 2019 tax year (for the first time) and subsequently, accountants have been allowed to see what the IRD has recorded under each client taxpayer for:

-       interest income

-       income from PIE Scheme investments (which includes all Kiwisaver funds).

PIE (Portfolio Investment Entity) Income and

PIR (Prescribed Investor Rate) - the related tax rate

A PIE scheme investment can be anything from a bank term deposit to an investment fund.

Because the rules regarding PIE tax rates are not straightforward there are opportunities both to be unreasonably overtaxed or if your affairs are managed correctly to pay significantly less tax than under the normal investment income rules.

 If your PIE tax rate is:

-       too high in relation to your total income you are not able to recover the tax overpaid on PIE income,

-       too low the PIE income needs to be brought into your taxable income for the year and taxed at your top marginal rate of tax,

-       just right the PIE tax does not need to be brought into your tax return and is a final tax.

For those taxpayers on the top 33% tax rate - the top rate and final tax on PIE schemes is 28% so a clear saving of 5% of the tax bill.

There is also the possibility in some circumstances to set up a scenario such as:

an investor with taxable income regularly around $45,000 and PIE income of say $20,000 need never pay tax at more than 17.5%. Whereas under normal rules all income above $48,000 would be taxed at 30%.

The right tax rate for a PIE scheme is based on your income for the most favourable (lowest income) of the last two tax years and is not related to your income in the current tax year.

PIE scheme investments held through a company offer no advantage, and those by a trust may or may not depending on the circumstances.

For those taxpayers with varying income levels the decision as to the correct PIR needs annual monitoring (and advice of any changing rates to the investment provider) to get the best advantage.

We have shown below (Appendix 1.) an extract from the IRD website that explains the rules regarding the correct PIR for an individual investor, otherwise please check with us if you have any doubts.


           
 

KIWISAVER

Assuming you intend to save it is still well worth using Kiwisaver as an investment option. For those over 16 and under 65 the government is still making the annual contribution of half the first $1,043 that a saver puts into the scheme.

This is true whether you are an employee or a self-employed person, though the employee has the additional benefit of the employer contribution.

 

 
APPENDIX 1.

IRD Guidance

PIRs Individual tax residents

New Zealand individuals have different PIRs depending on their worldwide income for the last two years.

The table below details requirements for each PIR. You need to work out your income for each of the last two years. You can then choose the lower PIR for the current year.

Taxable income was:

and taxable income including net PIE income

PIR

$14,000 or less

$48,000 or less

10.5%

$48,000 or less

$70,000 or less

17.5%

All other cases

 

28%

 

APPENDIX 2.

EXAMPLE OF IRD DEEMING TAXPAYER

ELECTING OUT OF SAFE HARBOUR

Joe taxpayer has Residual tax* on his (largely self employed) income as follows:

March 2018 Tax Year             3,000

March 2019 Tax year           15,000

March 2020 Tax Year           30,000

*Residual tax is what provisional tax is based on and is arrived at by deducting any tax already paid at source from the total tax liability for the year.

Because his 2019 tax year tax return was not filed until late January 2020 his first two provisional tax payments for the 2020 tax year were based on his 2018 return, the calculation of what was due for each instalment is $3,000 + 10% divided by three 3 = $1,100.

He paid                  August 2019           $1,100 but paid one day late

                             January 2020           $1,100

Then because his 2019 tax return was filed in February the provisional tax payable was revised based on the 2019 year as $15,000 +5% = $15,750 but as the first two instalments have passed he has to catch up the difference in the third instalment.

 ie: $15,750 less already paid $2,199, so he paid    May 2020       $13,550.

However Joe taxpayer and his accountant are in for a nasty surprise because when his 2020 tax return is filed in September 2020 IRD advise them that because the first provisional tax payment was received one day late Joe is deemed to have estimated his provisional tax and fallen out of safe harbour. What this means is that Joe should have paid his residual tax for 2020 in three equal instalments:

          August 2019             $10,000

          January 2020           $10,000

          May 2020                $10,000

Guess what - IRD Use of Money interest at 8.35% applies to the shortfall in payment at each of the due dates until the date that the tax is fully paid (ha ha we gotcha?).

Surely the lawmakers did not intend this unreasonable state of affairs.

Thankfully there are organisations that help manage tax by matching over and under payers at any date and giving both parties a better outcome than dealing with IRD.

Accumulus uses Tax Management NZ and would organize for Joe to purchase $2,000 at the correct date in August 2019. The interest is less than the IRD and avoids any penalties and puts Joe back into safe harbour so that the terminal tax (residual tax less the provisional tax already paid) of $30,000 – 15,750 – 2,000 = $12,750 is then due at the normal terminal tax date of April 2021.

This still imposes extra cost in interest and administration to minimize the extra cost of the IRD interpretation.

If you followed this example and it made sense either we should probably be offering you a job or we should be taking up teaching!



Regards
Alan Dodwell