Putting money aside for tax
This need will not affect taxpayers on salary or wages because PAYE tax deductions have already been made on their income before they receive it. They are paying tax as they are earning. If you are not on PAYE then you should consider seriously putting money aside weekly or monthly in a separate bank account to provide for future tax when it falls due.
Too many business advisers fail to advise clients on this point. The client is often under the mistaken belief that what he is spending is “what is his/hers”. This is incorrect.
A portion of what the taxpayer is using belongs to the tax man. The sad moment of truth comes when tax is due and the cupboard is bare. So take hint. If you don’t have tax deducted by instalments or you’re in business, have a chat to your accountant and decide on an amount that you should set aside periodically for tax.
At best it will only be a good estimate, but some provision is better than none at all.
The money should be banked in a separate savings account earning you interest while at the same time providing you with a steadily increasing “tax fund” to meet the heavy commitment when it falls due.
Warning – Don’t draw from this account except for tax. It is often a great temptation.
Budgeting for tax payments
It is therefore essential that you budget for all the tax payments you are required to make.
These payments include:
- income tax on your net business profit, which is calculated in your income tax return
- goods and services tax that you collect in after charging for your goods/services when you are registered for GST
- PAYE and other deductions from employees’ wages when you are registered as an employer.
How to budget
Simply calculate and put money aside in a savings account specifically for the sole purpose of future tax payments. For advice on what percentage of your income to put aside for tax purposes, contact your accountant or financial adviser, or a Business Tax Information Officer or a Maori Community Officer at Inland Revenue.
Budgeting for provisional tax
Like all other business expenses, you have to budget ahead for your taxes, so it is important to know:
- When the provisional tax payments are due
- How much they will be.
It is a good idea to use a separate bank account to put aside money to cover provisional tax payments. In your first year of business you should budget and put money aside for provisional tax. This will ease the cash flow in your second year of business, when you will need to pay provisional tax instalments for that year plus pay the tax for the first year of business. One way to spread the cost of your first year’s tax is to make voluntary payments to IRD during your first year.
Always plan ahead
The best thing to do is to plan ahead so you can pay the full amount on time. The IRD tax calendar can help with your budgeting so print out a copy to follow. To avoid a heavy bill for the whole amount on the due date (when you can least afford) make payments towards your tax bill before the due date, or if that is not possible put money aside in a separate bank account of your own so you earn interest on it up until the date when you pay your bill. The important lesson is to plan ahead and not wait until you run into financial or cash flow trouble.
Your options for payment
There are a range of options available from the IRD for paying amounts due. If you are unable to pay the full amount on time, you should contact the IRD as soon as possible. You do not have to wait until the due date for payment has passed before you act.
IRD will discuss your current circumstances and help you determine the best option for dealing with the amount due. They will look at your current situation, your payment history and your ability to meet future obligations.
When looking at your individual case they will follow established guidelines.
Options for payments are:
- Payment in full
- An instalment arrangement where you repay an agreed amount over time
- Writing off an agreed amount if IRD determines that full payment would cause you serious hardship
- A combination of an instalment arrangement with perhaps some of it written off.
If you can’t pay by due date
The best advice is to contact Inland Revenue before the due date to let them know about your financial difficulties.
Penalties and interest apply to tax bills that are unpaid by the due date but, if your financial situation prevents you from paying on time, they may set up an arrangement where you can pay the amount owing in instalments.
If you contact them and make a formal arrangement before the due date, as long as you meet all of your obligations under the arrangement you will only be charged one late payment penalty of 1%. No further penalties will be charged.
Even with an arrangement you are still charged interest on the tax owing.
So you may wish to consider borrowing money from elsewhere so that you can pay the tax bill by the due date.
Interest is charged
If you make an arrangement after the due date, any penalties already charged will stand. If you meet all of your obligations under the arrangement, no further penalties will be charged however, use of money interest continues to be charged.