Pool system designed to ease taxing interest rates

By BRIAN FALLOW

Businesses stung by the high use-of-money interest rates Inland Revenue charges on underpayments of provisional tax, or unimpressed at the low rate it pays on overpayments, now have an alternative.

Tax Management New Zealand, formally launched yesterday, is understood to be the first company to get into the new business of tax pooling, made possible by a change to the tax laws that took effect on April 1.

Tax pooling takes advantage of the wide margin between the 11.93 per cent rate at which the IRD charges interest on underpayments of provisional tax and the 4.83 per cent it pays for overpayments.

It is now possible for businesses to pay provisional tax via an intermediary, in effect pooling their payments with those of other businesses.

If overpayments were completely matched by underpayments in Tax Management NZ's pool, overpayers would receive an interest rate of 7.33 per cent, which is 250 basis points better than the IRD's, and underpayers would be charged 8.93 per cent, 300 basis points less than the IRD's.

In the worst case of no matching, no one would be any worse off.

Tax Management managing director Ian Kuperus said so far just under $50 million in provisional tax had been paid via the pool.

The Government justifies the wide margin in use-of-money interest rates by saying it does not want to give any incentive to taxpayers to use the tax system as a bank.

But it accepts that the estimates of full-year income on which provisional tax payments are made often prove to be wrong and that the interest cost, or opportunity cost, of those errors can be onerous. It promotes tax pooling as part of a programme of tax simplification.

Tax Management was co-founded by Kuperus, who formerly led the tax teams of Fonterra, the Dairy Board and the National Bank, and Philip Porters, whose background is corporate banking and risk management.

Its advisory board also includes Ernst & Young chairman Rob McLeod, barrister David McLay and Spyros Papageorgiou, group tax manager at the BNZ.

New Zealand Guardian Trust acts as trustee for all payments.