Commissioner’s interim operational position for tax pooling transfers of use-of-money interest
CIR's interim operational position (Sep 2015) relating to tax pooling transfers of use-of-money interest.
On 3 July 2014 the Minister of Revenue announced the Government's intention to pass legislation to allow tax pooling transfer requests that tax pooling intermediaries file on behalf of their clients to meet deferred tax obligations arising from the resolution of a dispute or an increased amount of tax to also include any underlying use-of-money interest on that deferred tax or increased amount of tax.
It is proposed that retrospective legislation will be passed that will:
- allow tax pooling intermediaries to request the Commissioner to transfer tax pooling funds to meet deferred tax obligations arising from the resolution of a dispute or arising from an increased amount of tax to also include any associated use-of-money interest with effect from 3 July 2014 and the 60 days prior to that date; and
- provide operational transitional provisions that will allow tax pooling intermediaries to make transfer requests inclusive of use-of-money interest from 3 July 2014 to the date the proposed legislation is enacted.
As there will be a period of time between the retrospective application date of the proposed legislation and its enactment, it is recognised that there are a number of interim issues that potentially arise.
The following questions and answers set out the Commissioner's current view, and the operational approach that the Commissioner will be taking to address these issues. Inland Revenue will continue to apply the current law until it is amended. Where possible we will also act consistently with the proposed law, where doing so is not inconsistent with the current law.
However, it must be recognised that until the law is changed there will inherently be some uncertainty. For example, the detail of the proposed legislation may change. It is strongly recommended that tax pooling intermediaries and taxpayers seek advice from a tax professional.
The following FAQs are to provide guidance to taxpayers on Inland Revenue's interim operational approach.
1. How does the current law apply?
Currently, tax pooling funds can only be used to meet certain tax obligations. Where there is also a use-of-money interest liability relating to those tax obligations the current law does not allow for this interest amount to also be met by using tax pooling funds.
For example, an emended assessment for the 2009-10 tax year for the natural person with a tax agent results in an increased amount of $10,000 tax. If the taxpayer is unable to source the $10,000 from a tax pooling account at the original due date (7 April 2011) use-of-money interest will accrue from 8 April 2011.
The taxpayer can only source tax pooling funds with an effective date of 7 April 2012; therefore the taxpayer will accrue use-of-money interest of $891.43 ($10,000 x 8.89% between 8 April 2011 and 7 April 2012 (366 days)).
The law requires that the $10,000 from the tax pool is firstly applied to the use-of-money interest obligation ($891.43) as at 7 April 2012. This leaves $9,108.57 to apply against the increased amount of tax of $10,000 which then leaves $891.43 tax still owing on which further use-of-money interest accrues from 8 April 2012 until the amount is paid. Tax pooling funds cannot be used to pay the $891.43 or any further use-of-money interest which accrues on this amount.
2. How will this change under the proposed law?
The proposed legislation will allow taxpayers to use tax pooling funds to meet the increased amount of tax as well as the associated use-of-money interest obligations. In the above example if the taxpayer was able to source $10,891.43 from the tax pool with an effective date of 7 April 2012, the total tax and use-of-money interest would have been fully paid as at that date. There would be no remaining amount of tax owing and no further use-of-money interest would accrue.
3. Who will this amendment apply to?
The proposed amendment will apply to any taxpayer who is a member of a tax pooling intermediary's tax pool and meets the criteria to use tax pooling funds to meet a tax obligation.
4. When will these changes be introduced?
The changes are included in the Taxation (Annual Rates for 2015-16, Research and Development, and Remedial Matters) Bill, which was introduced into Parliament on 26 February 2015.
The bill is expected to enacted in late 2015.
5. When will these changes apply from?
The proposed amendment will apply from the date of the Minister's announcement (3 July 2014) to any tax pooling transfer requests received from that date.
The proposed amendment will also apply to any tax pooling transfer requests which were received within the 60 days prior to 3 July 2014 relating to an increased amount of tax or to an obligation for deferrable tax. In this situation where a transfer schedule for the tax obligation was filed a further transfer schedule was able to be filed for any use-of-money interest obligations relating to the increased amount of tax or to the obligation for deferrable tax.
Any tax pooling transfer for use-of-money interest relating to a previously filed transfer schedule for the underlying tax will need to be filed within the same statutory timeframe as applied to the transfer schedule for the underlying tax.
6. How will Inland Revenue manage tax pooling transfer requests relating to use-of-money interest?
Until the proposed legislation is enacted Inland Revenue cannot process tax pooling transfer requests that relate to use-of-money interest. All tax pooling transfer requests relating to the tax amount will still be processed as normal.
Inland Revenue has been in contact with all tax pooling intermediaries and has asked them to make separate requests for transfers of use-of-money from requests to transfer tax. Inland Revenue will hold all tax pooling transfer requests that relate to use-of-money interest until the legislation is amended.
7. How will holding tax pooling transfer requests relating to use-of-money interest impact taxpayers' tax accounts?
Until Inland Revenue is able to process tax pooling transfer requests for use-of-money interest the tax accounts of affected taxpayers will show outstanding amounts of tax, use-of-money interest and late payment penalties.
Inland Revenue will work with affected taxpayers to ensure that as far as practicable any impacts on these taxpayers is minimised. Impacts can include the issuing of statements of account seeking payment of the outstanding amount, the offsetting of other tax refunds, (for example GST refunds), and other automated policing and debt recovery actions.
As far as possible Inland Revenue will try to intervene to prevent or mitigate automated policing and recovery actions. Where this is not possible, Inland Revenue will take steps to deal with any impacts (for example suppressing the issue of statements of account for affected tax periods, reversing an offset refund and refunding the amount), taking into account the circumstances of the affected taxpayer.
8. Can taxpayers make payment now of use-of-money interest if their tax pooling intermediary has also made a request to transfer tax polling funds to meet their use-of-money interest obligations?
Where a taxpayer's tax pooling intermediary has requested a tax pooling transfer relating to use-of-money interest, the taxpayer can make a payment directly to Inland Revenue to clear the residual amount owing.
Continuing with the example in Q1 above, if the taxpayer's tax pooling intermediary has filed a schedule for the $10,000 transfer effective on 7 April 2012 and a transfer schedule for the $891.43 also effective on 7 April 2012, Inland Revenue will process the $10,000 transfer and hold the $891.43 transfer.
The taxpayer decided to pay the account balance on 25 July 2014. The total amount owing was $891.43 as at 7 April 2012 plus use-of-money interest of $97.59 ($891.43 x 8.89% between 8 April 2012 and 7 May 2012 (30 days) = $6.51 and $891.43 x 8.40% between 8 May 2012 and 25 July 2014 (444 days) = $91.08).
The taxpayer pays $989.02 to clear their tax account.
The tax pooling intermediary's transfer schedule relating to the use-of-money interest will still be able to be processed when the proposed legislation is enacted. This will then result in the tax and use-of-money interest being fully satisfied as at 7 April 2012. The taxpayer will then receive a refund of any resulting excess tax they paid themselves ($898.02 in the example above). The taxpayer will also receive credit use-of-money interest on the $898.02.
The advantage of making payment of the use-of-money interest now and then seeking a refund after the tax pooling transfer relating to the use-of-money interest has been processed is that the taxpayer's account will not show an amount as overdue in the meantime, no late payment penalties will be applied, and offsets of refunds will not occur.
It also provides certainty for the taxpayer that they have paid their obligations as per the current law should the proposed legislative amendment not happen or it is enacted differently from what was announced.
9. What will happen if the proposed legislation is not passed or is passed differently from what has been announced?
If the proposed legislation is not enacted or is enacted differently from what was announced, Inland Revenue will provide further information on what this will mean for affected taxpayers. However, if there are amounts outstanding that cannot be met by the use of tax pooling funds the amounts will be payable, including any use-of-money interest and late payment penalties that have accrued.
10. Because qualifying tax pooling transfer requests have to be made by a tax pooling intermediary within a 60 day statutory timeframe, what happens if the amount of use-of-money interest changes before the legislation is enacted?
If an amount of use-of-money interest requested to be transferred is found to be incorrect after the proposed legislative amendments have been enacted, Inland Revenue will have the ability to make changes to the use-of-money interest transfer request before it is processed.
What changes are required and whether some of these will be possible will depend on the circumstances. The intent is to ensure that if there was an error made in calculating the use-of-money interest or the amount of use-of-money interest has changed as a result of something else occurring in the taxpayer’s tax account (for example a further amended assessment), the right amount is transferred at the relevant effective date(s).
While it is expected that a nil balance will result in the taxpayer's tax account in most instances, there may be other factors, including factors unrelated to tax pooling, which could impact the taxpayer's tax account which may result in a non-nil balance (for example if more tax pooling funds are required then these would have to be available in a tax pooling account to enable the use-of-money transfer schedule to be changed to increase the amount transferable).
11. Can a new or an amended tax pooling transfer schedule be filed for the use-of-money interest amount?
The proposed amendment to allow tax pooling transfers of use-of-money interest at backdated effective dates will be subject to the same statutory timeframes as tax pooling transfers of tax. This means that if a tax pooling transfer request for use-of-money interest is not made within the statutory timeframe, it cannot be accepted at a later date.
Any tax pooling transfer schedules relating to use-of-money interest that are requested within the statutory timeframe will not need to be re-filed or amended by tax pooling intermediaries. Inland Revenue will work with the taxpayers and tax pooling intermediaries when use-of-money transfer schedules are able to be processed and make any necessary changes.
12. What if an amount of tax, use-of-money interest and/or penalties remain outstanding after the use-of-money transfer schedule has been processed?
If any amount remains owing after a use-of-money interest transfer schedule has had all possible changes made to use additional tax pooling funds (and has been processed) any remaining amount owing, including any use-of-money interest and/or late payment penalties, will need to be paid by other means.
13. Will Inland Revenue remit use-of-money interest and/or penalties for taxpayers who are affected by the proposed legislative amendment?
Taxpayers are responsible for ensuring they pay the correct amount of tax, including any use-of-money interest and late payment penalties. By relying on the proposed retrospective legislative change taxpayers carry a risk that the change will not occur or that the change will not be exactly as was announced. Additionally, other factors could arise that have an impact on the taxpayer’s account balance and adds to the risk that any tax pooling transfer for use-of-money interest may not fully clear the taxpayer’s tax account.
Taxpayer's should seek independent tax advice in making any decision to meet their use-of-money interest obligations through tax pooling by relying on the proposed retrospective legislation change. If the law does not pass all risk lies with taxpayers if they choose not to follow the current law.
Where a taxpayer whose tax pooling intermediary made a request to transfer use-of-money interest within the statutory timeframe and following the processing of that transfer schedule the taxpayer still has an amount of use-of-money interest liability and/or late payment penalties have been applied, Inland Revenue will consider any request for remissions of the use-of-money interest and/or penalties under section 183D of the Tax Administration Act 1994.
Whether or not it is appropriate to grant any remission will be considered on a case by case basis taking into account all of the relevant individual circumstances of the taxpayer.