Get real about tax
Inland Revenue is cracking down on late payments. Businesses need to realise how high their financial liability could be and make paying the taxman on time a priority.
SOME NEW ZEALAND businesses appear hopeful and sometimes even adamant that, by ignoring the proverbial taxman, their tax payment obligations will go away. A number have already suffered significant penalties as a consequence.
Easy but foolish to ignore Inland Revenue
There are several reasons why so many businesses pay Inland Revenue late when the reality is they cannot afford to:
- Inland Revenue is a faceless government corporation that business owners do not necessarily have a strong relationship with.
- It often makes more sense to the business owner to stay current with suppliers or subcontractors who they do business with regularly. That way, they can continue trading with the support of these colleagues.
- If a business owner falls behind on payments to suppliers, they will usually receive a chase-up phone call. Inland Revenue will only send a letter, which can be easily ignored.
Unfortunately, however, the pain that follows late and missed payments to Inland Revenue can be widespread and devastating to a business, making it important to pay the taxman first and foremost.
Interest and penalties rack up quickly
The pain that Inland Revenue can inflict comes initially through use-of-money interest and late payment penalties. The interest rate increased to 9.21% from May and now adds:
- 1% late payment penalty the day after the due date
- 4% penalty 4 days later
- 1% penalty monthly thereafter.
This means the business owner can end up paying approximately 25% extra in 1 year due to penalties and interest – a greater cost than suppliers may enforce. This is a heavy burden for a business that is already under cash flow pressure.
Penalties and interest can quickly add up even when dealing with a relatively small tax obligation of $1,500 (see Figure 1).
Add in a late filing penalty of upwards of $250 for every return not filed by the due date, and you can begin to understand why so many businesses are sent into liquidation by Inland Revenue.
If a business is unable to meet a tax obligation, whether it is PAYE, GST or income tax, it is imperative that the business still files a return by the due date. This will at least save a late filing penalty.
Getting a break
If a business winds up in this situation, all is not lost. Inland Revenue is obliged to consider providing financial relief to taxpayers if a proposal is likely to maximise the recovery of outstanding tax as opposed to other options, for example, liquidation.
Instalment payments
One form of financial relief is an instalment arrangement where the tax can be paid over instalments over a negotiated time period.
If the business is proactive and can pre-empt being unable to meet a pending deadline, it should contact Inland Revenue before the due date and arrange an instalment. Confirming an instalment on the due date will incur a 1% penalty.
If the business has fallen behind on some taxes, agreeing an instalment plan will stop the penalties from being charged monthly, and only interest will be charged.
Debt write-off
Another form of relief can be to write off the core debt or penalties. The best person to apply for this is an accountant. They will prepare a proposal setting out why the business is in arrears, what the future looks like and the basis under which Inland Revenue should consider a write-off as relief.
IRD becoming stricter
However, Inland Revenue is becoming less accommodating in considering financial relief and accountants now need to prepare very strong arguments to support a request for relief. With total debt owed to Inland Revenue having more than doubled in 9 years (see Figure 2), it is taking serious measures to either collect debt or write it off as uncollectable. In doing so, a lot of taxpayers are being taken out of business.
If this sounds familiar, I encourage you to get advice. Talk to your bank. Talk to your accountant.
There can be a light at the end of the tunnel if you are proactive. There is no light if your head is in the sand!
Note
This is intended as general advice only. Contact your advisor or Staples Rodway if you have any specific questions about this topic.
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Articles are correct at the time of publication but may have since become outdated.
