About instalment arrangements
If you can’t pay your tax in full or on time an instalment arrangement could be an option for you to consider.
An instalment arrangement allows you to pay the tax in full by spreading it over a period of time. IRD will consider your situation, and look at your future income as well as other issues before agreeing to an instalment arrangement. Their whole objective is to ensure that the tax is paid in the shortest possible time while allowing you to still meet your on-going tax obligations (e.g. PAYE and GST).
Once you make an instalment payment arrangement any late payment penalties that would normally be charged cease immediately. This is conditional on the agreed instalment payments being made on time. If they are not paid on time problems can arise and the agreement can be amended or cancelled.
IRD will charge what is known as use of money interest on the amount of money overdue and this continues over the period of the arrangement. That is, penalties will stop but interest will continue to be charged.
Application for an instalment arrangement
Inland Revenue will require relevant information to be provided to them in support of your application for an instalment arrangement. This will include all the financial information that you normally file with your tax returns.
While this information is generally included in the business accounts with your tax return (if you are a business) the IRD may ask for further information before they can assess the matter. Once an application for an instalment arrangement has been received IRD has four options. They may accept the request, seek further information, make a counter offer or decline the request.
Inland Revenue’s authority to enter into an instalment arrangement for the payment of tax debt is required under law to maximise the recovery of tax from a taxpayer but not if:
- The recovery will represent an inefficient use of IRD resources
- The instalment arrangement places the taxpayer, who is a natural person, in serious hardship.
If Inland Revenue is likely to recover more from an instalment arrangement than from bankruptcy or liquidation action against a taxpayer, the instalment arrangement will generally be favourably considered.
Late penalties cease as soon as instalment plan in place
As long as you make the agreed payments under an instalment plan, IRD will stop charging you late payment penalties from the day you set it up. They can still charge “Use of Money” interest however because this compensates the government for unpaid tax being settled late. Inland Revenue will charge you the first 1% late payment penalty if you set up a plan before the due date, as long as you keep to it.
If you set up a plan on or after the due date, they’ll charge you the first 1% plus a further 4% in penalties.
Monthly late payment penalties are only charged up until the date you set up the plan—as long as you keep to the plan.
Paying your tax by a plan also means IRD won’t take further actions to collect the money you owe, including extra payments from your wages. However, an instalment plan doesn’t automatically include any future taxes you may have to pay.
If you qualify for a late payment “grace period” then contact IRD about making an instalment plan before the grace period ends. It means late payment penalties will stop as soon as you set up that plan.
The advantage is that you won’t see the penalties added until the grace period has ended.
Guidelines for making your instalment payment proposal
This is some of the information that you should consider when proposing an instalment arrangement to IR. First you will need to file all outstanding tax returns because without it an assessment cannot be made of your situation by Inland Revenue.
When proposing an instalment arrangement information IRD will need includes:
- Your name, IRD number, address and contact details
- A tax type (e.g. income tax or child support)
- Periods the arrangement is for
- How much you propose to pay, the frequency of your payments and how you will pay
You should also include as much supporting information as you can because this will help the IRD make a decision on your proposal promptly.
Inland Revenue will reply to any instalment arrangement proposals within 3 to 5 working days.
How to make an arrangement proposal
There is no standard form to use to make a proposal.
You can simply propose an arrangement by:
- completing an instalment arrangement proposal online
- emailing a proposal to IRD by secure mail
- telephone IRD
- posting your proposal to IRD
You should make the payments outlined in your proposal even if IRD hasn’t yet confirmed agreement to the arrangement.
Work through your Accountant
When making an application for time to pay overdue tax and penalties, it is always best to work through your professional adviser. Talk to your accountant who can expedite this process in the correct manner for you right from the start. They can also seek remission of some if not all of the penalties charged you if the circumstances of your case warrant it.
It can save you a lot of headaches as often IRD will not grant an instalment payment deal until they have received additional information such as details of your income, living expenses and other material they need to assess your application.