Provisional tax pooling

Sections OB 33(1), RP 17, RP 17B, RP 18(2)(c), RP 18(2B) and RP 19 of the Income Tax Act 2007; sections 15N to S, 120C(1), 120OE(1) and 173M of the Tax Administration Act 1994

A number of amendments have been made to the provisional tax pooling rules to ensure:

• the legislation reflects the original policy intent of the rules;
• to extend tax pooling to reassessments (including voluntary disclosure and resolution of dispute) of most taxes; and
• to enable pooling funds to be transferred between intermediaries.

Background

The tax pooling rules were introduced in April 2003 and allow compliant taxpayers to reduce their exposure to use-of-money interest on under-payments as a result of uncertainty about their provisional tax payments by purchasing funds from, or depositing funds with, a tax pooling intermediary.

Tax pooling generally involves a taxpayer depositing money with a tax pooling intermediary. The deposit earns interest. The intermediary deposits that money in his or her pooling account with Inland Revenue. The taxpayer may use the funds (deposit) in the future to pay his or her outstanding tax liabilities or sell the funds to other taxpayers who are clients of that tax pooling intermediary. If the taxpayer sells the funds, the intermediary will facilitate the sale, for a fee. On payment of the fee, the intermediary transfers the funds to the other taxpayer’s income tax account as at the date that the money was originally deposited with the intermediary. Tax pooling allows provisional taxpayers to access money at lower interest rates than if they failed to pay provisional tax on the due date and were subject to use-of-money interest. It also enables taxpayers who have overpaid their tax to get a higher return, from selling the funds, than they would receive from Inland Revenue.

Key features

The major change to the tax pooling rules are as follows:

• ensuring the legislation reflects the original policy intent that the only regular tax payments that tax pooling funds can be used for is provisional tax and terminal tax. Pooling funds cannot be used for regular payments of non-income tax obligations such as PAYE, FBT or GST;
• extending the tax pooling rules to reassessments of most taxes, including voluntary disclosures and resolution of disputes;
• enabling pooling funds to be transferred between tax pooling intermediaries to foster competition among intermediaries and ensure the integrity of the rules are maintained;
• requiring pooling funds for payment of provisional or terminal tax liabilities to be accessed within 60 days of the terminal tax date; and
• enabling all taxpayers to deposit money into a tax pooling account. Previously only provisional taxpayers could deposit money into tax pooling accounts.

Application date

The changes apply from the date of Royal assent, being 6 October 2009.

Detailed analysis

Transferring funds between pooling intermediaries

Pooling funds held with one intermediary can now be transferred to another intermediary while retaining the original deposit date. The transfer must be at the taxpayer’s request (made via their intermediary) and will apply to both existing deposits and future deposits. This will foster competition between intermediaries and also assist intermediaries entering or exiting the pooling rules. Amendments have been made to sections RP 18(2) and RP 18(2B) of the Income Tax Act.

An amendment has been made to section RP 19(1) of the Income Tax Act to enable a tax pooling intermediary to transfer funds from his or her tax pooling account either to the taxpayer or to another intermediary. Previously, a tax pooling intermediary could not transfer funds to another intermediary and retain the original deposit date.

Transfers to be made within 60 days of terminal tax date

The tax pooling legislation has also been amended (by introducing a new section RP 17B(4) and amending section RP 19(3) of the Income Tax Act) to ensure that taxpayers who want to access funds held by a tax pooling intermediary to meet their provisional tax and/or terminal tax liabilities have 60 days from their terminal tax date to access such funds. This was the original intent of the legislation.

Transfers made after more than 60 days of terminal tax date

Changes have been made to the way tax pooling funds are treated if a taxpayer accesses funds after the 60-day timeframe. A new section has been introduced (section RP 19(1B) so that pooling funds will first be applied to pay any interest that the taxpayer is liable for and then any remainder is applied to meet the person’s core tax liability. Transfer requests made more than 60 days after the terminal tax date will not be able to be made using backdated effective dates.

Restricting tax pooling for regular tax payments

The fundamental principle on which tax pooling is based is the reduction of interest in situations when the taxpayer is uncertain of the amount he or she is required to pay on the due date. If there is certainty of liability on the due date, the taxpayer is required to pay that amount and tax pooling is not available.

To reflect this intent, the tax pooling rules have been amended (sections RP 17 and new section RP 17B to ensure that the only regular tax payments that tax pooling funds can be used for are provisional tax and terminal tax. Pooling funds cannot be used for regular payments of non-income tax revenues such as GST, FBT or PAYE, as the amount due is known on the due date.

Extending tax pooling to reassessments (including reassessments resulting from voluntary disclosures and disputes)

There are other instances, apart from provisional tax, when a taxpayer can be uncertain of their tax liability, namely additional tax payable as a result of a reassessment, including reassessments resulting from a voluntary disclosure or a dispute with Inland Revenue. Changes have been introduced which extend the tax pooling rules to additional tax payable as a result of a reassessment (including from voluntary disclosures and the resolution of a dispute) for most tax types.

New section RP 17B has been introduced to extend the tax pooling rules to include reassessments of most taxes, including reassessments from voluntary disclosures and resolution of disputes.

The provision requires an assessment to be issued before tax pooling can be used. This enables an increased amount of tax, the taxpayer’s original liability, to be identified. There are instances where an original assessment is not issued, such as for PAYE and FBT. The Commissioner is still considering how the legislation will be applied for voluntary disclosures of PAYE, RWT and FBT where an assessment has not been made. Clarification will be provided in an upcoming operational statement.

It is difficult to provide for all possible reassessment scenarios in legislation. Instead, the legislation provides that tax pooling will be available for the increased amount of tax, being the difference between the taxpayer’s previously assessed liability and the amount that results from:

• the Commissioner amending an assessment under section 113 (Commissioner may at any time amend assessments) of the Tax Administration Act.
• the Commissioner making a determination under section 119 (Commissioner may determine amount of provisional tax) of the Tax Administration Act.
• the assessment being made because the person or the Commissioner is deemed under section 89H as having accepted a proposed adjustment; or
• the person is making a voluntary disclosure.

Taxpayers can use tax pooling funds provided they are requested within 60 days of:

• the date the amended assessment is issued;
• for disputes, the date of the resolution of the dispute; or
• for disputes before the courts, the date on which the court proceedings are finally determined.

The Commissioner considers that tax pooling would be available for the difference between the amount of tax owing at the time the NOPA is issued resulting in the current proceedings and the final assessment. Where a dispute is before the courts, Inland Revenue considers that court proceedings are finally determined by either withdrawing from proceedings as well as a court judgment.

To provide some clarity on the legislation, Inland Revenue considers that tax pooling will be available in the following circumstances. These examples are not exhaustive and Inland Revenue will also be publishing comprehensive operational guidelines on how tax pooling will be determined, which will expand on these examples.

These examples illustrate the general principles that the Commissioner will consider in administering section RP 17B of the Income Tax Act. Other relevant factors will need to be taken into account in determining whether pooling funds will be available. Inland Revenue will be issuing operational instructions that will elaborate on these examples.

One taxpayer sourcing tax pooling funds for multiple taxpayers no longer allowed

As a result of the legislative changes to the tax pooling rules, a practice that Inland Revenue has accepted in the past will change. The practice relates to the transfer of tax pooling funds for multiple taxpayers into one taxpayer’s income tax account and a subsequent request is then made to on-transfer those funds to the “associated” taxpayers at backdated effective dates.

This practice was allowed where the taxpayers were all “associated” and could all have sourced the tax pooling funds individually. In these cases Inland Revenue would process the on-transfer request.

This practice will no longer be allowed as the tax pooling rules only allow taxpayers to use tax pooling to meet their own tax obligations.

Inland Revenue will decline tax pooling transfers if these are sourced by one taxpayer for other taxpayers, or reverse these if this is determined after the funds have been transferred. This may result in the “associated” taxpayer not being able to use tax pooling at backdated effective dates if a tax pooling intermediary cannot request a transfer in the correct taxpayer’s name within the 60-day timeframe allowed.

Other amendments to the Income Tax Act

There has been some uncertainty over how the term “tax paid” should be interpreted. Section 120C(1) of the Tax Administration Act has also been amended to clarify that “tax paid” means the amount transferred to a taxpayer’s account or a tax pooling account by the original due date for the tax.

For income tax this means the terminal tax date, and for non-income tax revenues this means the original due date for the payment of the tax.

Funds that cannot be sourced on or before the terminal tax date or original due date, as applicable, will first be applied to any interest owing at the effective date of the transfer of those funds and any balance will be applied to the tax owing.

This means taxpayers who cannot source the full amount of increased tax obligations at the terminal tax date or original due date, as applicable, will not be able to source more funds to meet any interest or penalties that they may also be required to pay. This includes the situation where some or all of the funds sourced from a tax pooling account may be applied against interest and penalty obligations.

Imputation credit account implications

When a company deposits money in a tax pooling account, a credit is made to the company’s imputation account at that time. However, if the money in the tax pool is subsequently transferred to pay a reassessed amount of tax that is not income tax, the amendment to section OB 33(1) of the Income Tax Act provides that the imputation account is debited by the amount of the transfer at the time the funds are transferred.

Similarly, when a company taxpayer sells money that it has previously deposited in a tax pooling account, the imputation account is debited by the amount of the funds sold, as this is treated as a refund. The debit to the imputation account arises at the date of sale.

When a company taxpayer’s tax pooling funds are transferred to another pooling intermediary, there are no impacts on the company’s imputation account solely because of such a transfer.

Imputation credit account implications - company purchases funds

Where a company taxpayer purchases tax pooling funds to meet an income tax obligation, including from a reassessment, the company’s imputation account is credited by the amount of the funds purchased. The credit to the imputation account arises at the effective date of the transfer.

Commissioner’s notification

The current legislation requires the tax pooling intermediary to provide the Commissioner with details relating to deposits made with the intermediary. On receipt of this information, the Commissioner provides this information back to the intermediary. In practice, the Commissioner does not currently provide the details back to the intermediary. To do so would increase both compliance and administration costs, with no real gain.

Section RP 18(4) has been amended to require simply that the Commissioner confirms receipt of details provided by the pooling intermediary, rather than provide the details back to the intermediary.

Who can deposit money into a tax pooling account

Currently only provisional taxpayers can deposit money into a tax pooling account. With the extension of the tax pooling rules to reassessments of most taxes, the rules now allow all taxpayers to deposit money into a tax pool as they could be subject to a reassessment of taxes. This should provide a source of funds for tax pooling intermediaries.

Other amendments to the Tax Administration Act

Interest paid on deposits in tax pooling accounts

Section 120OE(1) has been amended to ensure that interest is paid by the Commissioner on money deposited in a tax pooling account from the date of deposit until such time as the amount is refunded or transferred.

Renumbering of provisions

Existing sections 15Q to 15V have been renumbered and are now contained in sections 15N to 15S.

Transfer of excess tax to another taxpayer

The transfer rules have been amended to enable taxpayers to transfer excess tax to a tax pooling intermediary (section 173M(2)(fb)).

Also, this amendment clarifies that transfers can be made from any tax type to a tax pooling account. The effective date of the transfer will be the date of the request or a later date (not a backdated date).