Taxation Q&A

Understanding Provisional Tax, UOMI, and Early Payment Discounts

Student Inquiry:

Hi Michael, I have questions regarding the 'in-class practice':

"In order to minimise use-of money interest charged from the third instalment, Lincoln should pay an amount equal to the expected tax liability for the income year, less the sum of the amounts paid at the first and second instalments." The >$60,000 safe harbour rule indicates UOMI will be delayed charged until the final instalment date, in this case, 7th May 2024. If on the 3rd instalment Lincoln still pays $49,000 (same as the first 2 instalments) under the standard method how will the interest be charged? I think it will be charged on the actual difference $$$ and the time frame is between 7th May and the date you pay your underpay (after IRD processes your tax return). However, if Lincoln pays $196,000 - $49,000*2 = $98,000 on the 3rd instalment, is that allowed? And does that mean there is no UOMI to be charged if the actual income tax exactly matches the total that you already paid throughout the year? And of course, the company between 31st March - 7th May should already finalise their income statement for the whole financial year, so they know the actual income tax; they just pay whatever difference is on the 3rd instalment to avoid the UOMI totally. Is my understanding correct?

The early payment discount: image.png

If the 105% applies does that mean the taxpayer doesn't pay RIT at all, but also gets an extra 5% as an overpaid interest? Thank you very much. Looking forward to your reply.

My Reply:

Please find my responses below:

1 - The $60,000 threshold is for the entire income year. In the question, the company is able to apply for the safe harbour despite having taxable income exceeding the threshold ($60,000). This is due to the latest changes of safe harbour rules (link). The effect of the proposed changes will be to remove UOMI for the first two provisional tax instalments for these taxpayers, allowing them to pay their entire provisional tax liability for the year by the third instalment, with no UOMI charge. Safe harbour for all provisional taxpayers using the standard uplift method. So, no UOMI charge if the taxpayer applied the standard uplift method and paid for two instalments already.

2 - A 6.7% discount of tax aims to encourage individuals who begin receiving self-employed or partnership income to pay tax voluntarily in the year before they begin paying provisional tax. This will relieve the financial strain they face when they begin paying provisional tax and have two years' worth of tax payments to make, namely, income tax for the prior year and provisional tax for the current year. If the 105% of the prior year’s RIT is less than 6.7% income tax paid during the year, then the 105% of the prior year’s RIT will be the discount figure. For example:

• If the prior year’s RIT is $6000 -> 105% of $6000 is $6300

• If the amount of paid income tax of the current year is $100000, then the 6.7% of $100000 is $6700

• In this case, the discount value should be $6300. And the net income tax paid this year will be ($100000 - $6300) = $93700. [$6300 will be refunded as the discount] RIT is different from paid income tax.

• RIT is the residual income tax (the tax liability remaining to be paid, or the tax amount that hasn’t been paid)

• Paid income tax is how much tax has been paid (not the tax liability)

You may find more examples from the IRD website: Link Hope this clarifies your questions. 😊

Navigating Tax Obligations for International Students Working for Overseas Companies

Student Inquiry:

Hi Dr. Michael,

Regarding the lectures today, I would like to have some questions. For my specific case, as I am still working as a contractor to one of the Australian companies while studying here in New Zealand. I am an international student, not an Australian resident; my income is from an Australian company, paid into the bank account in Australia as I still hold the Australian bank account, and I transferred money to the New Zealand bank account just to cover my living cost expenses.

My question is the income I earn while I live and work in New Zealand, it means I am, of course, a New Zealand resident for tax purposes and have to pay the progressive rate for my income as a kind of business income - owner of income. In Australia, I do not hold any visa at all and no longer live in Australia, what they suppose to treat me as the foreign income. What I suppose to think is that I need to pay all the tax in NZ and also do not need to pay tax in Australia.

Is all my understanding correct, please? Also, do I need to pay the ACC Levy? Do I need to pay the provisional tax payment? Drafty my monthly income is around $1,000 only, not that much.

So how about the interest income I earn from the money I still keep in the bank of Australia, is it still needed to pay tax in Australia?

A bit complicated, but much appreciated if I receive your consulting.

My Reply:

Based on my understanding, I have provided my thoughts below: Note: I am only providing you general feedback and this should not serve as the official recommendations.

…my income is from an Australian company, paid into the bank account in Australia… The general rules are:

• If you're a New Zealand tax resident, you need to pay tax in New Zealand on your worldwide income. (see IRD link)

• If you receive income from overseas while you’re a New Zealand tax resident, you must report it. (see IRD link)

• You'll need to file an individual income tax return - IR3 at the end of every tax year you receive income from overseas, and complete the Overseas income summary - IR1261 - with the breakdown of your income and tax credits. This includes when you've arrived in New Zealand part way through a tax year. In your case, you only need to declare your overseas income from when you became a New Zealand tax resident, because you've only become a New Zealand tax resident partway during the year. To determine your tax residency, you will become a New Zealand tax resident when the first of these happens (see IRD link):

  • you’ve been in New Zealand for more than 183 days in any 12-month period

  • you have a permanent place of abode in New Zealand. During the period when you are a non-resident taxpayer, you only need to pay tax on income earned from New Zealand. But once you become the NZ resident taxpayer (which will likely be after 183 days of your staying here), you will need to pay tax on your global income.

• It is likely that your income from Australia and paid into an Australian bank had already had a certain amount of tax deducted. This tax paid can be used as a foreign tax credit to offset your calculated income tax here in New Zealand. (for example, in Australia, you had already ‘paid’ $200 tax, but your total overseas income leads to a calculation of $500 income tax liability in NZ. Then, through your tax return, you can claim the $200 tax credit and only need to pay $300 (500-200) tax here in NZ).

• For ACC Levy payment, my guess is you may receive an invoice after you file a tax return. (see ACC link).

• You are unlikely to need to deal with provisional tax because this is mainly designed for employers/small businesses/self-employment, whose residual income tax (not the income figure) is more than $5000 per year.

• For your interest income in the Australian bank, you will also need to record and report the total amount and tax deducted in Australia. The tax being deducted can be used as the foreign tax credit, the interest income will be assessable income in NZ. One last thing, I would suggest you register your IRD number to avoid any surcharge (higher tax rate).

Understanding Tax Liabilities and Payment Timelines

Question 1: If there is any tax liability that needs to be paid at the end of the financial year, will the IRD require payment within a specific period? In what situations might it still be outstanding until the next financial year?

My Reply: Generally, you need to send the IRD the completed tax return by 7 July unless you have a tax agent or an extension of time. Your current year’s tax liability must be paid and typically cannot be carried forward by default. Failure to make a tax payment, which is considered as unpaid tax liability, will be subject to various consequences, such as use-of-money interest (UOMI) and shortfall penalties. Taxpayers generally do not have incentives to delay tax payments for consecutive years due to potential penalties.

Dual Income Tax Returns for Businesses and Partnerships

Question 2: Does the requirement for a business to file two income tax returns mean one is for business partners and the other for the partner's personal income tax return form?

My Reply: In practice, the two income tax returns refer to IR7 (Income tax return) for the business and IR7P (Partnership income/loss attribution) for detailing individual partners' income or losses. Every partnership or look-through company (LTC) must complete an IR7 return, showing their total income after expenses, and attach either the IR7P or the Look-through company (LTC) income/loss attribution - IR7L. The original wording can be found in the IR7G guide, page 4.

Clarifying Tax Residency Status

Questions about Tax Resident:

3.1: Robert met the PPOA rules first, as he hadn't stayed for 183 days. So, I think he should be considered a tax resident starting 1 May 2011, but why 1 Feb 2011? Does this mean the 183 days rule has priority?

3.2: There seems to be a typo regarding his transitional residence status being from May 2011. Is this correct?

My Reply:

• You are correct; it should indeed be May 2011. That was a typo. The specific determination of tax residency can depend on several factors, including the presence of a permanent place of abode and the 183-day rule.

Tax Residency for Short-Term Visitors

Question 4: If a businessman comes to NZ for holidays, arrives on 1/1/2023, leaves after 183 days on 15/7/2023, and never returns, does he become a tax resident on 1/1/2023 and then a non-tax resident on 15/7/2023? Would all his overseas employment income be taxed in NZ during his residency?

My Reply: For holiday purposes, an individual wouldn't typically intend to apply for an IRD number, thus avoiding tax residency considerations. However, if someone intends to stay longer and applies for an IRD number, becoming a tax resident after 183 days, they must wait for 325 days after leaving NZ to become a non-resident. This scenario is hypothetical and unlikely due to entry purposes and work restrictions. More official interpretations can be found here.

Applying Tax Losses in Income Tax Calculations

Student Inquiry:

I was following the example towards the end of the lecture and was wondering why the tax loss is applied before calculating the income tax liability instead of being deducted alongside the tax credits.

My Reply:

The rationale behind deducting a tax loss, carried forward from previous years, at the taxable income stage is as follows:

• A tax loss implies that there is no tax payment due.

• A prior year's tax loss results in zero tax payment.

• Once a company incurs a loss, this loss is applied at the taxable income stage (stage 1). There is no need for stage 2 (calculating the tax liability).

• Therefore, the tax loss remains at stage 1, as it is not a figure derived by applying the tax rate.