Can tax pooling work in Australia?

By Gary Anders

New Zealand businesses are presented with provisional tax bills from the Internal Revenue Department (IRD) three times a year, with payments due in January, May and August.

However, instead of having to dig into their cash flow to pay their tax liability by the due dates, businesses have the option of delaying parting with their funds by using the services of non-bank intermediaries known as tax poolers.

How tax pooling works

New Zealand’s tax pool system combines income tax payments from businesses across the country and allows taxpayers to, effectively, trade those tax payments to match their needs.

Instead of paying tax directly to the IRD, a business has the option of using the tax pool whenever it suits them.

If a business has underpaid tax during an income year, it can purchase tax credits from a tax pooler, which will settle the liabilities with the IRD. This minimises or eliminates any late payment penalties the business would need to make to the IRD.

If a company has overpaid tax during an income year, it can sell its excess tax payments into the tax pool and earn premium interest on those excess funds.

Funds deposited into the tax pool remain in the pool until a business directs the funds to be used to purchase tax to settle its liabilities, on-sold to another taxpayer or refunded.

Can tax pooling work in Australia?

Tax Traders, an Auckland-based tax pooling intermediary, is proposing a similar type of system for pay as you go (PAYG) tax instalments in Australia.

The company has developed a product solution that would enable Australian businesses to delay upcoming PAYG payments, whereby “businesses will be provided with flexible tax payments for a low-cost upfront fee”, says Josh Taylor, Tax Traders’ co-founder and head of product.

However, the product’s structure requires changes to the Income Tax Assessment Act 1997, with Tax Traders currently in talks with the federal government.

Reducing uncertainty

Keith Taylor, tax policy manager at the IRD, says the tax pooling system was set up to reduce uncertainty for taxpayers within New Zealand’s provisional tax system by reducing their exposure to interest costs.

“Any difference between a taxpayer’s provisional tax paid and the actual tax liability for the year could be subject to interest, and tax pooling provided a mechanism to reduce that exposure by charging interest at a lower rate,” he says.

“Although the provisional tax system has changed considerably since the introduction of tax pooling, the regime continues to reduce any uncertainty for provisional taxpayers.”

Not all New Zealand businesses use the tax pooling system, but the IRD says that, historically, about 75 per cent of provisional tax payments have flowed through tax pools.

“The main benefits of using intermediaries for provisional tax payments fall with the taxpayer, but a number of those can have spin-off benefits for the Inland Revenue,” Taylor says.

 

"The reduction in uncertainty around paying provisional tax can reduce tension points around the provisional tax system, which assumes a taxpayer earns their income evenly over the course of a tax year." 

 

“For example, the reduction in uncertainty around paying provisional tax can reduce tension points around the provisional tax system, which assumes a taxpayer earns their income evenly over the course of a tax year.

“In addition, the ability to finance provisional tax payments through intermediaries can see some taxpayers meet tax payments they may have defaulted on without the lower cost of funds provided by tax pools.

“Tax pooling does reduce visibility for tax forecasting purposes, although since our new information technology platform has come online, this process has improved.”

Primary advantages

Angus Ogilvie FCPA, chair of CPA Australia’s New Zealand Tax Committee and managing director of Generate Accounting, says tax pooling has become such a standard way of funding provisional tax debt that some clients just pay one tax bill a year.

“Its primary advantage is that it allows a taxpayer to determine when they’re going to pay tax, not when the Inland Revenue suggests they might,” he says.

“For businesses owing tax, the tax pooler will deposit the correct amounts of provisional tax on the precise dates that it should have been paid, which, by doing so, wipes out all the penalties.

“The other thing that is enticing is that the rate of interest payable to the tax pooler is typically about 30 per cent lower than what the IRD would be charging.

“Not only is the client eliminating penalties, but they also pay slightly lower interest. And the other thing about it is that the interest is a deductible expense in the next income tax return.”