The New Zealand tax year ends on 31 March.
Returns (if required) must be filed by 7 July each year, depending on the income type and/or the country of source. An extension of time until the following 31 March is available for taxpayers with a tax agent. Individuals file separate returns. There is no provision for joint returns for spouses. Failure to file a return (if required) may result in prosecution and penalties. There is no requirement to file a return for most individuals who earn only employment income, or income where tax is deducted at source at the appropriate rate.
Payment of tax
Residual income tax (RIT) is the amount of income tax payable by a taxpayer after deducting tax credits but before deducting any provisional tax paid. Every taxpayer who is liable to pay RIT exceeding NZD 2,500 for an income year will be a provisional taxpayer for the next year (unless their RIT for the next year is below NZD 2,500). Provisional tax is generally payable in three equal instalments.
Taxpayers may reduce their exposure to use of money interest (UOMI) on provisional tax by using an Inland Revenue approved tax pooling intermediary. Tax pooling intermediaries facilitate the trading of under-payments and over-payments of provisional tax and typically save taxpayers 2% to 3% on the official rates.
Calculating provisional tax
Provisional taxpayers have four options for calculating their provisional tax payments.
These options are:
- The standard uplift method.
- The estimate method.
- The GST ratio method.
- The accounting income method (AIM).
Standard uplift method
Under the standard uplift method, the general rule is that provisional tax payable is 105% of the RIT for the previous income year. However, if the prior year tax return has not been filed due to an extension of time for filing, the provisional tax payable can be based on 110% of the RIT for the income year before the previous income year (i.e. two years ago), but only for the first two instalments. The final instalment must be calculated based on 105% of the previous income year’s RIT.
Provisional tax can be based on an estimate of the income year’s RIT. A taxpayer who chooses to estimate RIT is required to take reasonable care when doing so.
GST ratio method
The GST ratio method enables smaller taxpayers to align their provisional tax payments with their cash flow and reduce their exposure to UOMI. The option benefits 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.
Accounting income method (AIM)
Available from the 2018/19 income year onwards, AIM is targeted at small to medium sized businesses with annual gross 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 minimise exposure to UOMI.
When the taxpayer files their tax return for the year, 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.
Use of money interest (UOMI)
Taxpayers are required to pay interest when taxes are not paid by the due date for payment. There is a corresponding requirement for the Commissioner to pay interest to the taxpayer when the taxpayer has overpaid tax. UOMI applies to most tax obligations (e.g. income tax, PAYE, FBT, GST).
Certain taxpayers are subject to the UOMI regime. From the 2018 tax year, there have been changes to the way interest is calculated on over and underpayments. When RIT exceeds provisional tax paid, the taxpayer may be liable to pay interest on the underpayment. This is generally where they pay provisional tax on an estimated basis or when they have RIT exceeding NZD 60,000. Interest is payable regardless of culpability. When provisional tax paid exceeds RIT, the taxpayer in some scenarios may be entitled to receive interest on the overpayment.
Under the new interest rules, from the 2018 tax year, as long as a taxpayer has made provisional tax payments in full and on time under the standard method, credit and debit interest starts from the day after the:
- terminal tax date if one's RIT is less than NZD 60,000 or
- final instalment date if one's RIT is NZD 60,000 or more.
Taxpayers can also make voluntary payments. However, if provisional tax is paid under the standard method at the first and second instalment, this will minimise exposure to UOMI.
From 29 August 2019, the interest rate for overpaid tax is 0.81% and the rate for underpaid tax is 8.35%. Interest is generally calculated from the due date for the third instalment of provisional tax if the taxpayer has paid under the standard method at the first and second instalment. Interest paid is deductible for both companies and individuals, while interest received is taxable.
An initial late payment penalty of 1% applies if the taxpayer does not pay tax by the due date. A further 4% late payment penalty applies if the tax is still not paid within seven days of the due date. An incremental late payment penalty of 1% is then imposed monthly until payment is made. The 1% monthly penalty is no longer being charged on amounts that remain unpaid for the 2018 year onwards. The initial penalty of 1% and a further 4% penalty will still be charged.
Inland Revenue is required to notify a taxpayer the first time their payment is late rather than imposing an immediate late payment penalty. If the taxpayer does not make payment by a certain date, Inland Revenue will impose a late payment penalty. Taxpayers are entitled to one notification every two years. After receiving a first warning, Inland Revenue will not send further notifications for two years and will impose an initial late payment penalty 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. These are:
|Action subject to penalty||Standard rate (%)||Rate after reduction by 100%/75% for disclosure before audit or timing error only (%)||Rate after reduction by 40% for disclosure during audit (%)||Rate after reduction by 75% for disclosure when filing (%)||Rate after increase by 25% for obstruction (%)|
|Lack of reasonable care||20||0||12||NA||25|
|Unacceptable tax position||20||0||12||5||25|
|Abusive tax position||100||25||60||25||125|
There is a 50% discount on certain penalties when 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.
When a taxpayer discloses a tax shortfall voluntarily before notification of a tax audit or investigation, penalties imposed for lack of reasonable care and for taking an unacceptable tax position are reduced by 100%.
Tax audit process
The name of the New Zealand tax authority is the Inland Revenue Department (IRD). The IRD initiates a tax audit by sending a letter to the taxpayer notifying them they are undertaking an audit. The letter generally outlines the tax type(s) and year(s) under audit, and includes a list of questions and/or document requests. The IRD normally provides a deadline for response within the letter.
Statute of limitations
The IRD generally has four years from the end of the tax year in which a tax return was filed to reassess the return. The limitation period does not apply to a tax return that is fraudulent or wilfully misleading or omits income.