The safe harbour provision cannot be used by provisional taxpayers if they fail to make their standard uplift payments on time and in full. Tax pooling, however, can fix this.
What is Safe Harbour?
The safe harbour provision is the threshold at which, if income tax for the year is underpaid, IRD use of money interest applies. The threshold is residual income tax of less than $60,000. If a taxpayer follows the safe harbour criteria, the IRD can only charge interest from their terminal tax date if they have not paid any amount due at that time. This provision may be used by taxpayers who pay their provisional tax using the standard uplift method and make all the required payments on time and in full. It may also be used by taxpayers when their residual income tax is less than $60,000 in their first year of operation.
Safe harbour: what it is and the conditions
Safe harbour is a safeguard whereby the IRD will not charge interest between the final provisional tax payment and the terminal tax date if they underpay their income tax for the year under consideration.
At their terminal tax date, any final balance to settle what they owe for the year will be due. Interest shall only apply from that date if, by then, the taxpayer does not pay.
For the 2018 tax year onwards, safe harbour is available to individuals as well as companies and trusts.
In order to enjoy this concession of interest, the taxpayer must:
they have paid all instalments under 1 of the standard methods on or before the instalment dates or they have no obligation to pay provisional tax
their RIT is less than $60,000 for the tax year
they have not estimated their RIT for the tax year
they have not used a GST ratio method in the tax year to determine the amount of provisional tax payable for the year, and
they don't have a provisional tax interest avoidance arrangement.
When a taxpayer fails to pay uplift
If a taxpayer does not pay the amount of the uplift due on time, they are outside the safe harbour. They share the same consequences if they pay on time, but the sum they pay is less than uplifting.
The consequences
Taxpayers who do not comply with the safe harbour requirements shall be subject to the rules applicable to all standard taxpayers in respect of the uplift.
As such, from their final instalment date on the outstanding balance, they will incur IRD interest to settle their debt for the year.
If, at the first or second instalment, the uplift was not paid on time or in full, then they would also be liable for interest from this date on the lesser of:
The uplift instalment due, minus the amount they paid in relation to that instalment; or
The actual income tax liability divided by the number of instalment dates for the year, minus the amount they paid in relation to that instalment.
Tax pooling places taxpayers secure in a safe harbour
In the event that a taxpayer defaults or fails to pay any uplifting instalments, they can use tax pooling to meet the safe harbour requirements retrospectively.
This is achieved by buying surplus tax paid to IRD from the registered tax pooling provider on the date it was originally due and applying it against their liability.
To return to safe harbour, a taxpayer actually purchases the amount of tax that they need to pay in order to fulfil the uplifting instalment obligation that they have missed or underpaid.
As the taxpayer is purchasing from the tax pooling provider, the date is stamped as at the original date it was due, IRD treats it as if the taxpayer paid their provisional tax on time when it processes this transaction. This eliminates any late payment penalties.
The taxpayer has some interest to pay – but this is cheaper than what IRD charges for a missed or underpaid provisional tax instalments.
Source: TMNZ & IRD
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