Tax returns are based on the fiscal year ending 31 March, although other fiscal year-ends are possible if permission is obtained.
The system is one of self-assessment, under which the corporation files an income tax return each year. For those not linked to a tax agent, returns must be filed by 7 July. The filing date for taxpayers linked to a tax agent is extended to 31 March of the following year.
Payment of tax
Terminal tax payment is due on 7 February for balance dates between 31 March and 30 September. For other balance dates, terminal tax payments are generally due on the seventh day of the 11th month following the balance date. The terminal tax due date is extended by two months for taxpayers linked to a tax agent.
Provisional tax payments are generally due in three instalments: (i) 28th day of the seventh month before the balance date, (ii) 28th day of the third month before the balance date, (iii) 28th day of the month following the balance date.
Calculating provisional tax
For the 2022/23 income year (i.e. year ending 31 March 2023), provisional taxpayers have the following five options:
- Where the 2021/22 return of income has been filed, 2022/23 provisional tax can be based on 105% of the 2021/2022 residual income tax.
- Where the 2021/22 return of income has not been filed, due to an extension of time for filing, 2022/23 provisional tax can be based on 110% of the 2020/21 residual income tax, but only for the first two instalments. The final instalment must be calculated based on the first option above or the expected income tax liability for the period.
- Provisional tax can be based on a fair and reasonable estimate of the 2022/23 residual income tax.
- The GST ratio option.
- The Accounting Income Method (AIM).
The GST ratio option enables smaller taxpayers to align their provisional tax payments with their cash flow and reduce their exposure to use of money interest. The option is intended to benefit those taxpayers with declining, seasonal, or fluctuating income. This option calculates provisional tax by reference to the taxpayer’s GST taxable supplies in the relevant provisional tax instalment period.
AIM is available for businesses with gross annual income of less than NZD 5 million. AIM uses accounting information from the business’ accounting software for a period as a basis for calculating the tax liability of the business for that period. The resulting amount is payable by the taxpayer as a provisional tax instalment.
Taxpayers can also make voluntary payments. Such payments can be made to minimise exposure to use of money interest. A taxpayer choosing to estimate residual income tax is required to take reasonable care when estimating.
When the taxpayer’s return of income for the year is furnished, the provisional tax paid for that year is credited against the tax assessed. This results in either a refund or further tax to pay by way of terminal tax.
For the 2017 and prior years, where provisional tax paid was less than the amount of income tax deemed due on that instalment date, interest was imposed. If provisional tax was overpaid, interest was payable to the taxpayer. Interest was deductible for tax purposes by business taxpayers, and interest earned on overpaid provisional tax was gross income for tax purposes.
From the 2018 year and onwards, there is no interest charged by or received from Inland Revenue if the first and second instalments are in line with the standard uplift method (described as options 1 and 2 above). A taxpayer will be exposed to full use-of money interest (UOMI) from the point they choose to estimate. ‘Provisional tax associates' should use the same method (i.e. standard or estimation).
Use-of-money interest (UOMI)
From 9 May 2023, the interest rate for unpaid tax is 10.39% and the rate for overpaid tax is 3.53%. Previously, (from 17 January 2023 to 8 May 2023) the interest rate for unpaid tax was 9.21%, while the rate for overpaid tax was 2.31%.
Safe harbour from UOMI
A safe harbour rule from UOMI is available to taxpayers who have a relatively small amount of residual income tax in order to alleviate the impact of UOMI. Generally, if the taxpayer has paid all provisional tax instalments under one of the standard methods during an income year and has an amount of residual income tax for an income year that is less than NZD 60,000, UOMI will be deemed to be due and payable in one instalment on the taxpayer’s terminal tax date.
Taxpayers are able to pool their provisional tax payments with those of other taxpayers through an arrangement with a commercial intermediary. Tax pooling allows underpayments to be offset by overpayments within the same pool and vice versa. Tax pooling allows for more favourable interest rates for the taxpayer and greater flexibility.
New provisional taxpayer
Where a new business has residual income tax of over NZD 60,000 in the first year of trading, it is required to pay provisional tax in one to three equal instalments (dependent on the start date) to prevent use-of-money interest arising.
An initial late payment penalty of 1% applies if a tax payment is not made on the due date. A further 4% late payment penalty applies if the payment is not made within seven days of the due date.
Inland Revenue is required to notify a taxpayer the first time their payment is late and will provide a grace period rather than imposing an immediate late payment penalty. If payment is not made by the new due date, a late payment penalty will be imposed from the original due date. Taxpayers will be entitled to one notification every two years. After receiving a first warning, Inland Revenue will not send further notifications for two years, and an initial late payment penalty will be imposed in the normal manner.
Shortfall penalties, calculated as a percentage of the tax shortfall resulting from the action or position taken by the taxpayer in a tax return, may also apply.
There is a 50% discount on certain penalties where the taxpayer has a past record of ‘good behaviour’ and, in certain circumstances, a cap of NZD 50,000 on shortfall penalties for not taking reasonable care or for taking an unacceptable tax position.
Shortfall penalties may also be reduced by making a voluntary disclosure of the relevant shortfall before notification (or commencement) of an audit.
Tax audit process
Inland Revenue maintains an active audit programme across all tax types and taxpayer profiles and regularly publishes information about their compliance focus. Often, Inland Revenue audits are preceded by a risk review where Inland Revenue requests information in order to evaluate the risk of non-compliance. Where this review detects an issue that requires further inspection, Inland Revenue will then advise that an audit will be commenced.
Statute of limitations
The general rule is that Inland Revenue has four years from the end of the New Zealand income tax year (31 March) in which the return is filed to re-assess the return, unless the return is fraudulent, wilfully misleading, or omits income of a particular nature or source.