Tax pooling: because sometimes paying IRD isn't your best option
Tax pooling: because sometimes paying IRD isn't your best option 🤯
Tax pooling is one of those things that sounds exceptionally boring until you find yourself with a tax bill you weren’t expecting.
Then it can suddenly become very interesting.
Most people who have heard of tax pooling know it as a way of dealing with provisional tax that wasn’t paid on time. But it can actually give businesses quite a bit more flexibility around when and how they pay tax.
You can use it to fix an old tax shortfall, spread tax into smaller regular payments, or even get more time to pay when cash flow is tight.
So, how does it actually work?
First, what is tax pooling?
Normally, when you pay tax, the money goes straight to Inland Revenue.
With tax pooling, you instead pay an approved tax pooling intermediary. They hold tax payments in a pool and can later transfer the appropriate amount to your IRD account.
That might sound like an unnecessary middleman, but the pooling part is exactly what makes it useful.
Some businesses put too much tax into the pool. Others haven't paid enough. Because those payments sit within the tax pooling system, intermediaries can effectively match those two situations up.
And that's where things get clever.
Got an old tax bill? You may be able to buy tax from the past
This is probably the most useful reason to know tax pooling exists.
Imagine we finish your accounts and discover your tax position was higher than expected. You should have paid another $20,000 of provisional tax six months ago, but you didn't know that at the time (unlikely if you're working with us, but it happens, so please play along!).
You could pay the $20,000 to IRD now.
The problem is that, as far as IRD is concerned, that money has been missing for six months. Depending on the circumstances, you could therefore have use-of-money interest running on the shortfall.
Tax pooling gives us another option.
Someone else may have paid too much tax into a tax pool six months ago. You can potentially purchase $20,000 of that tax, and have it transferred to your IRD account carrying that earlier date.
From IRD's perspective, the $20,000 can then be treated as having been there from the permitted earlier date, rather than arriving today.
But buying old tax isn't free
This is an important bit.
You pay the tax pooling intermediary for the $20,000 of tax plus the cost of purchasing it, which can include interest and fees.
So we're not making the interest cost disappear altogether. We're effectively replacing the cost of being late with IRD with the cost of purchasing correctly dated tax through the pool.
The reason we consider doing it is simple: the tax pooling cost can be cheaper than the use-of-money interest you'd otherwise pay to IRD.
We can compare the options before doing anything and work out whether using the pool actually saves you money.
There are also rules around which tax liabilities qualify and deadlines for getting tax transferred, so it isn't something we can use indefinitely for every old tax bill. The circumstances need to be checked first.
You can also make smaller, regular tax payments
Tax pooling doesn't only come into play when something has gone wrong.
It can also be used proactively.
Provisional tax is normally paid in several larger instalments throughout the year. That's perfectly manageable for some businesses. For others, those dates seem to arrive approximately five minutes after they've spent the cash on something else.
Instead, you can make smaller weekly, fortnightly or monthly payments into a tax pool.
Those payments are held against you within the pool and, once we know what your actual tax position is, the appropriate amount can be transferred to IRD.
If you've paid too much into the pool, there may be options to have the excess refunded or sold. If you haven't put enough in, we can look at purchasing additional tax.
It effectively lets you treat tax more like a regular business expense rather than a handful of large cash-flow events during the year.
What if the tax is due and you simply don't have the cash?
There's another use for tax pooling: tax finance.
Let's say you've got a $30,000 provisional tax payment due, but paying it right now would put unnecessary pressure on the business.
A tax pooling intermediary can potentially fund the tax at the relevant provisional tax date, while you arrange to pay the amount to the intermediary later.
Again, this isn't free. You'll pay a finance charge and potentially other fees for the additional time.
But it gives us another funding option to compare against paying IRD late or borrowing the money elsewhere.
Sometimes the cheapest answer will still be to pay IRD. Sometimes it won't.
Why wouldn't we just pay everything into a tax pool?
Because tax pooling is a tool, not automatically the best place for every tax payment.
If your tax position is straightforward, you've got the cash available and your provisional tax payments are working perfectly well, there may be no particular reason to change anything.
Where tax pooling gets really useful is when there's a mismatch between when tax is due and when the business actually has the cash available, or when we find out after the fact that the amount paid wasn't right.
It can be particularly useful when:
you've underpaid provisional tax;
an old or unexpected income tax liability appears;
you want to smooth large provisional tax payments into regular amounts; or
you need some breathing room before paying a tax bill.
And if you've overpaid tax into a pool, there can be more flexibility around what happens to that money too.
One rule before paying an unexpected tax bill
If you've got an old or unexpected tax bill*, don't automatically pay it straight to IRD before checking your options.
Once we know what the tax relates to, when it should have been paid and how much is owing, we can see whether tax pooling is available and compare what it would cost.
Sometimes paying IRD directly will be the best answer.
Sometimes purchasing tax from the right date through a tax pool can save a decent chunk of interest.
And sometimes the biggest benefit isn't the interest saving at all - it's simply being able to pay the tax in a way that works much better with the cash flow of the business.
*Again, less likely if we're working with you proactively on tax throughout the year, but very handy to know if that hasn't previously been happening.
See below for some tax pooling intermediaries we've worked with:
