Don’t push that button

Why has that one little button on the IRD website become so dam tempting lately? Clicking that button is akin to touching fire or voluntarily standing on a landmine. It’s a relatively non-descript button welcoming you to ‘Estimate provisional tax’ and it seems to be big with the DIY crowd this year. Don’t get us wrong, estimation is a great tool for tax specialists but if you’re doing-it-yourself prepare for third degree burns, of the monetary kind.

Estimation seems simple enough, right? Your income is down and your provisional tax bill seems far too high. Perhaps, you don’t want to bother your chartered accountant so ring the IRD instead. Big mistake! There’s a high probability the IRD helpline is manned by an inexperienced trainee, possibly going by the name of ning-nong. Ning-nong will be lovely. She’ll empathise with your plight and gleefully tell you to estimate. But (big but) chances are she won’t explain the terrifying repercussions of changing your tax method or the clever alternatives to blindly pushing that nuclear reactor of an estimation button.

Method change looming

This is where things get brain frazzling for non-accountants because there are several provisional tax methods, with the default being the bog standard method.

• The standard method is kind. Under standard, if you don’t pay enough provisional tax you’ll escape IRD interest so long as you pay the final balance on time.

• The estimation method is meaner. It opens you up to IRD interest from way back when your first provisional tax bill was due. And there’s no going back to the safety of standard method (cue horror scream).

Estimation risks

By estimating you risk paying IRD interest for hundreds of extra days. Your daily interest bill may start from August, instead of April the following year. That’s a whopping 223 days of additional interest.

Other ‘stabby’ things include the following:

• Your terminal tax is essentially due much earlier, typically in May instead of April the following year.

• You wipe out the opportunity to use back-dated tax at it’s most effective because estimating generally means your total residual income tax (RIT) is divided into three equal instalments and paid equally across three provisional tax dates.

• By estimating you expose yourself to extra penalties, invented especially for estimators. On top of those underestimation penalties there’s also the usual culprits, along with the potential for prosecution:

-Not taking reasonable care (20%)

-Unacceptable interpretation (20%)

-Gross carelessness (40%)

-Abusive tax position (100%)

-Tax Evasion (150%)

Scar free alternatives

We’ve found by far the most cost-effective alternative to estimation is to stick with the standard method, pay your first two instalments of provisional tax and then reduce the final instalment, under the guidance of a chartered accountant.

If you can’t pay the first two instalments, we’d encourage you to stay on the standard method and buy back-dated tax later. You’ll need to hold your nerve as the IRD bombards you with overdue notices but even Ning-Nong will be understanding if you explain your intention to use tax pooling. She may not understand tax pooling but she’ll have a button to push which slows down the onslaught of notices.

Alternatively, you can move away from the standard method and instead use the AIM method where you pay provisional tax with your GST returns. This works incredibly well because you only pay tax when you make a profit.

For bigger fish, you’ll typically work with your chartered accountant every month to forecast your tax bills accurately throughout the year and find the best tax strategy for you.

Solution

But what if you’ve already got yourself in an estimation pickle? Our advice is to complete your income tax return and re-estimate well before the 7th of May (then pray harder than you’ve ever prayed before). And next time you have a choice between two big buttons, it’d be wise to push the big friendly one which dials your chartered accountant. Remember, they’ve got your back - they know your big picture. The IRD doesn’t.

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