IRD IT systems struggle with provisional tax, by Stewart Russell

Many of you will be aware of the various changes to the IRD computer systems over the last few years.  Most of the changes have been for the better and made life easier for the taxpayer to file their information or pay tax on time.

However, we have noticed recently that the IRD system does not always have the correct provisional tax information.

The concept of provisional tax is that the taxpayer pays tax on income during the period income is being derived. An individual or entity becomes a provisional taxpayer when their residual income tax (RIT) exceeds $5,000. RIT is the amount of tax on the income for the year less any tax credits such as tax deducted from interest, PAYE etc. 

The default basis is that provisional tax is based on 105% of the prior year tax liability spread across 3 equal instalments.

If you haven’t filed your prior year tax return yet – then the provisional tax due is 110% of the year prior to last year.

Although the IRD have spent many millions on their new IT system, it is struggling to deal with taxpayers who haven’t yet filed their prior year returns.

For most taxpayers the second provisional tax payment was due on 15 January.  But for clients who haven’t yet filed their March 2021 return, the IRD doesn’t show the amount due (which would have been a third of 110% of the March 2020 tax liability).

There are many taxpayers who have not yet filed their March 2021 return, as if they use a tax agent and have a valid extension of time, the final date for filing. those returns is 31 March 2022.

Some taxpayers went onto the IRD website on 15 January to pay their provisional tax direct – only for the IRD system to not allow this, as there was no “amount due” showing.

This became an issue with the last update when IRD enabled taxpayers to pay their tax liability via the IRD website.  Any taxpayers who make payments through their internet banking provider, will not face this problem.

It is unclear at this stage whether IRD will cancel late payment penalties for taxpayers who tried to pay their tax on time, but the IRD’s website would not allow them.  Their computer system automatically calculates the penalties, and it can be difficult to get them reversed.

A safer method to avoid penalties would be to use a tax pooling agency.

PKF NZ member firms are premium partners with New Zealand’s largest tax pooling company – Tax Management NZ (TMNZ). This gives us the ability to buy backdated payments (subject to time limitations), thus eliminating late payment penalties and saving up to 30% on IRD interest rates. 

TMNZ also provides tax planning flexibility for future payments and handling tax for multiple-entity groups.

If you are still confused by provisional tax and its application to your situation, feel free to speak to one of our team, who will be happy to explain.