Reductions in UOMI and Penalties

On 21 February 2017 new tax legislation was passed that will have some real benefits to tax payers, especially those who trade through a company structure. The benefits relate to provisional tax payments and in particular, use of money interest (UOMI) charged by Inland Revenue.

As your accountant one of our key jobs is to ensure you pay the correct amount of provisional tax, firstly so that penalties are not incurred and secondly so that UOMI is not incurred or at least minimised. For the 2016-17 year Inland Revenue charged UOMI at 8.27% for underpaid tax. For overpaid tax Inland Revenue would only pay 1.62%.

The difficulty that would arise is that for companies and trusts (and individuals with over $50,000 of residual income tax) the tax had to be paid in 3 equal instalments, ie 1/3, 1/3 and 1/3 during the year to avoid UOMI. It is not always easy to estimate what the final profit for the year will be and therefore how much tax should be being paid at provisional tax time.

This unfair rule that assumed a straight-line earning of income throughout the year has now been removed for those tax payers who choose to use the standard “uplift” method for paying provisional tax.

A new rule has been introduced, whereby UOMI will only apply from the final instalment of provisional tax, ie 7 May*. The final instalment is after the end of the financial year so provided you have a good estimate of your 31 March accounts payable and accounts receivable and any other balance date accruals any catch up of underpaid tax can be done at that time and no UOMI will be incurred for underpayments 28 August or 15 January*.

Of course any tax payer who chooses to pay less tax than the standard uplift method calculation (which is based on the either of the previous 2 years residual income tax) will still risk not only UOMI but also late payment penalties.

However there is further good news regarding late payment penalties. From the 2017-18 tax year Inland Revenue will no longer impose a 1% monthly incremental late payment penalty on unpaid tax. Initial late payment penalties will still be applied, being 1% the day after the due date and another 4% 6 days later. However, thereafter the very onerous 1% per month has been removed. Only UOMI will apply. This applies to Income Tax, GST and overpayments of Working for Families Tax Credits.

These new rules will apply for the 28 August 2017 provisional tax payments so we look forward to applying them for our clients.

*assumes a March balance date