Taxman juggles with rate for underpaid and overpaid tax

For the second time in four months the Government has changed the basis on which it sets the use-of-money interest rate Inland Revenue charges for underpaid tax.

On March 1 the rate was cut from 14.24 per cent to 9.73 per cent as part of the "rolling maul" of measures to assist hard-pressed businesses.

At the same time the methodology was changed from using the Reserve Bank's estimate of a business base lending rate plus 2 per cent to the 90-day bank bill rate plus 4.5 per cent.

It has now been changed again to the floating mortgage rate plus 2.5 per cent, which currently gives a rate of 8.91 per cent.

Had the former methodology continued it would have lowered the underpayment rate 7.3 per cent. From Inland Revenue's point of view that is getting too close to prevailing mortgage rates which many small-to-medium enterprises which borrow against the security of a property pay.

The use-of-money interest rate is intended to compensate the Government, or the taxpayer in the case of overpayment, for the time value of money. It is not intended to provide the option of using Inland Revenue as a bank.

The overpayment rate has also been cut, from 4.23 per cent to 1.82 per cent. That gives a wide margin from the 8.91 per cent Inland Revenue charges. But it argues that at 4.23 per cent it was too close to bank deposit rates.

Deloitte managing tax partner Thomas Pippos said the use-of-money interest rates were a huge irritant.

"In times like these there is a lot of volatility in earnings. Taxpayers who simply try to pay the right amount of tax on time are still exposed to the underpayment rate if their estimate of tax is ultimately shown to be wrong."

And tax disputes often took years to resolve, by which time the interest could end up being a large part of the sum at stake.