TaxPooling Review– Summary

19September2014

InlandRevenue

September2014

TaxPooling – Summary

1180583_2

Contents

Executive summary3

Nextsteps5

Introduction6

Howtaxpoolingoperates10

Keyplayersinthetaxpoolingindustry12

Page ii

Executivesummary

Background

Taxpoolingwasfirstintroducedin2003toallowtaxpayersanavenuetomitigatethefinancialconsequencesthatariseasaresultofgettingtheirprovisionaltaxestimationwrong.ThisisdonebyallowingtaxpayerstoaccessbetterratesthroughapprovedintermediariesthatarbitragethelowoverpaymentUOMIrateandhighunderpaymentUOMIrate.

Taxpoolingappearstobeoperatingwithefficiencyandnosignificantissueshavearisentodate.However,giventhegrowthintheuseoftaxpoolingbytaxpayersaswellasitscontinuingevolution,considerationshouldbegivenastowhetherthereareanypotentialrisksthatmaynot bewellunderstoodbykeystakeholders.

Thisreportconsiderstheoperationoftaxpoolingandprovidesasummaryofthelifecycleofthevarioustaxpoolingtransactions.Italsoidentifiesthekeyrisksassociatedwithtaxpooling.

OverallfindingofPhaseOne

Taxpoolingisoperatingwellandisaserviceandoptionthatisvaluedandusedextensivelybytaxpayers.Taxpoolingappearstobeachievingthepolicyobjectivesenvisagedwhenitwasdeveloped.

Taxpoolinghasevolvedbeyondthesaleandpurchaseoftax

Taxpoolingcontinuestomeetthepolicyobjectivesthatitsetouttoachieve.Thatis,itallowstaxpayerstomitigatetheirexposuretoUOMIcostsasaresultoftheuncertaintytheyfacedintryingtoestimatetheirprovisionaltaxobligations.Thisiseffectivelydeliveredbythesaleandpurchaseoftaxinataxpool.

However,additionaltransactiontypeshavebeendevelopedincludingtheprovisionoftaxfinancetotaxpayerstoallowthemtomanagecashflowissues. Taxfinancewasnotanticipatedbypolicymakersatthetimetaxpoolingwasfirstintroduced.FurtherconsiderationshouldbegiventotaxfinancetoensureitdoesnotresultinadditionalrisksforInlandRevenue(IR)aswellasother keystakeholders.

Thereisminimalregulatoryoversightontaxpoolingintermediaries

Taxpoolingintermediariesaresubjecttoscrutinywhentheyfirstapplytobecomeanintermediary.However,followingapprovalthereislittleregulatoryoversightimposedontheintermediaries.Inparticular,nochecksaredonebyIRtoensure

thatthetaxpoolingintermediarycontinuestomeetthelegislativerequirementsimposedunderthetaxlegislation.

Theonlyongoingregulatoryoversightwouldappeartobeinrelationtotheanti-moneylaunderingandcounteringfinancingofterrorismframeworks.

Considerationshouldbegiventowhetherfurtherchecksshouldbeperformedtoensuretheintermediariesarecontinuingtomeetthestandardssetoutinthelegislation.Forexample,adequaterecordsarebeingkepttoprovideconfidencethattaxpayerswouldbeabletoaccesstheirfundswhenrequired.

Further,IRshouldestablishprocessestoensurethatifthelegislativestandardsarenotmet,IRisawareandabletowinduptheintermediaryifrequired.

Considerationshouldalsobegivenastowhetherfurtherregulatoryoversightisnecessarygiventhenatureoftheservicesthatareprovided.

Theriskofsomethinggoingwrongmaybelowbuttheconsequenceswouldlikelybesignificant

Theriskofsignificantissuesarisingfromtaxpoolingappearstobelow.Thisisinpartduetotheindustrypracticesthathavebeenadoptedbythetaxpoolingintermediariesthemselves,forexampletheuseofindependenttrustees. However,theconsequencesshouldsomethinggowrongwouldlikelybesignificantforIRintermsofreputationalriskandcouldextendtoothergovernmentagencies.Thisisonthebasisthattheremaybeapotential perceptionthattherehasnotbeenadequategovernmentoversightovertaxpoolingtoensuretaxpayers’fundsareprotectedagainstthingssuchasfraudulentactivities.Inaddition,publicperceptionmaybethatanyissuesthatarisearetheresponsibilityofIRtoremedy.

IRshouldthereforebeclearthatitiscomfortablewiththelevelofregulatoryscrutinythatisimposedontaxpoolingintermediarieswhenbalancedwiththelevelofriskandthepotentialconsequences.

Thereisalackoftransparencyaroundtaxpooling

Thereisverylimitedinformationpublicallyavailablethatcomprehensivelyexplainstaxpoolingandthevariousservicesthatareprovided.Whiletaxpoolingmaybeunderstoodataconceptuallevel,itisdifficulttoaccesstheinformationrequiredtofullyunderstandtheintricacyoftheservicesprovided.

Theremaybelegitimatecommercialreasonsforthelackoftransparency.

However,careshouldbetakenthatIRisfullyinformedandunderstandsalloftheservicesthatareprovidedbytaxpoolingintermediaries.

TherearesomeoperationalriskswithinIR

TherearesomerisksinthewayIRcurrentlyoperatestaxpooling.Theseincludemanualcalculationsbeingperformed,aheavyrelianceoncertainkeypersonnelwithinIRtooperatetaxpooling,lackofreconciliationsbeingperformedontaxpoolingbalanceswiththetaxpools,andthepotentialforpolicydecisionstobemadebyoperationalstaff.

IRshouldensurethatadequatesafeguardsareinplacetoensurethattaxpoolingoperatesasintended.ThismayincludeIRhavingmoreoversightofthetaxpoolingprocessasawhole,aswellasdevelopingreconciliationprocedureswiththetaxpoolingintermediaries.

Difficultiesinrevenueforecast

Taxpoolingprovideschallengesforrevenueforecastingasfundsdepositedintoataxpoolarenotrecognisedastaxrevenueunderthecurrentprocesses.Astaxpoolingcontinuestogrow,theissuewithrevenueforecastingwillonlybecomemoresignificant.However,itwasrecognisedthatrevenuerecognitionforyear-endpurposesshouldnotbeskewedbytaxpoolingasalltaxpoolingtransactionswouldneedtohavebeencompleted beforeIRyearend(30June).

IRmaywishtoinvestigatewhetheradditionalinformationordatasharing,internallyorwithtaxpoolingintermediariescouldeliminatesomeoftheriskscurrentlyassociatedwithhowtaxpoolinginteractswithrevenuerecognition.

Nextsteps

Phase1ofthetaxpoolingreviewhasidentifiedthattaxpoolingisoperatingwellandisaserviceandoptionthatisvaluedandusedextensively bytaxpayers.Taxpoolingappearstobeachievingthepolicyobjectivesenvisagedwhenitwasdeveloped.

Ourreviewhasidentifiedcertainrisksthatexistwithinthetaxpoolingframework.IRshouldconsidertheserisksanddeterminewhetherfurtheranalysisshouldbeundertakeninordertobetterunderstandhowtheserisksarecurrentlybeingmanaged,theconsequencesoftheexposuretotheserisksand,ifappropriate,howtheserisksmaybemitigated.

IntheeventthatIRconsidersfurtheranalysisshouldbeundertaken,wewouldrecommendthefollowingapproach:

  • performmoreindepthanalysistounderstandhowtheserisksarecurrentlybeingmanagedbythekeystakeholderssuchasIR,taxpoolingintermediariesandtrustees
  • identifythepotentialareasofriskexposurebyhighlightingthesignificantareasofunmitigatedriskandunderstandingtheconsequencesofthisexposure
  • considerationofopportunitiesthatwouldenhancetaxpoolingtobettermeetstakeholderrequirementsandbettermanagerisks.
Potentialsolutions

WhilePhase1ofthereviewisfocusedontheidentificationofrisks,weprovidesomehighlevelcommentsonpotentialsolutionsthatIRmaywishtoconsider.

Wenotethatthesearemerelyobservationswehavemadetodateaspartoftheriskidentificationphaseandthereforeshouldnotbetakenasthecompletesuiteofpotentialsolutions.Asreferredtoabove,thismayrequireIRtoundertakeasecondphaseofwork.

  • IRshouldconsiderexpandingtheregulatoryoversightithasovertaxpoolingintermediaries.OurinitialviewisthatIRis bestplacedtoprovidethatoversightastaxpoolingisfundamentallypartofthetaxsystem.Thismayincludeannualcheckstobeperformedbytheintermediariesthattheycontinuetomeetthelegislativerequirements,togetherwithsomeformofqualityassuranceprogrammeoversystemsandprocesses.
  • PeriodicreconciliationproceduresshouldbeadoptedbetweenIRandthetaxpoolingintermediaries/trusteestoensurethesystemsareoperatingastheyshould.
  • IRshouldincreaseitsunderstandingofthecommercialaspectsoftaxpoolingandthepolicyobjectiveoftaxpoolingtoensurethatthereisaclearunderstandingwithinIRofhowthevariousservicesofferedbytaxpoolingintermediariesoperate,andhowthatdeliversthepolicy.
  • IR,Treasuryandthetaxpoolingintermediariesshouldholdaworkshoptodiscusstherevenueforecastingissueandagreeaprocesstoresolvetheforecastingchallenges.
  • IRshouldconsidermakingtheuseofanindependenttrusteeasalegislativerequirementonthetaxpoolingintermediaries.
  • RecognisingthatsometaxpoolingtransactionshavecharacteristicsoffinancialinstrumentsIRshouldholdfurtherdiscussionswiththeFinancialMarketsAuthoritytoexploreanyconcernsthatdepartmentsmayhaveinrelationtotheservicesthatareprovided bythetaxpoolingintermediaries,forexample,taxfinancing.
  • IRshouldmaintainregularinteractionswithotheragenciesthathavearoleintheregulationoftaxpoolingintermediaries,includingtheDepartmentofInternalAffairs,toensurethereisagoodgeneraloverviewofthetaxpoolingindustry.

Introduction

Background

NewZealand,incommonwithmanyotherjurisdictions,hasaregimeinplacewhichrequirestaxtobepaidthroughouttheyearasprofitsarisebasedonanestimationoftotalannualprofit.Underthisregime,provisionaltaxisrequiredtobepaidbytaxpayers(includingcompaniesandindividuals)iftheirresidualtaxliabilityfortheincomeyearisoveracertainlevel.1Theprovisionaltaxispayableinthreeequalinstalmentsthroughouttheyear.

Giventhevolatilityofbusinessprofits,IRallowsthreemethodsfortaxpayerstocalculatetheamountofprovisionaltaxthatispayableforanincomeyear.Taxpayershavetheoptiontochooseoneofthemethodsoutlinedbelow.

  • The“standardcalculation”methodisthedefaultcalculationmethodwhichbasestheprovisionaltaxpayablefortheyearonapercentageupliftofthemostrecentresidualincometax.
  • Taxpayersmaybasepaymentsontheirownestimatesofactualprofitlevels.
  • TaxpayersmaybasepaymentsonapercentageoftheirGSTtaxablesupplies(“GSTratiomethod”).
Howtoensuretaxpayersmakeaccurateprovisionaltaxpaymentsthroughouttheyear?

Acombinedregimethatimposesinterest(referredtoasuse-of-moneyinterestor“UOMI”)and/orpenaltiesisinplacetoensuretaxpayersareincentivisedtomakeaccurateprovisionaltaxpayments.Broadly,penaltiesareimposedifpaymentsare

madelate2oriftheamountofprovisionaltaxpaidisnotareasonableestimateof

taxpayable.3

1Themajorityof individual taxpayersdonotfallinto theprovisionaltax regimeas tax isfullywithheldatsourceon income receivedby wageandsalary earnersandbank interest.

2Thelatepayment penaltyhas twocomponents:

UOMIispayableorreceivabletotheextentthatactualtaxableincomeismoreorlessthantheestimatedamount,thereforeresultinginanunderpaymentoroverpaymentofprovisionaltax.ThevariabilityinbusinessprofitsmeansthatUOMIoftenarisesevenifdetailedestimatecalculationsareundertakenbytaxpayers.

TheUOMIrate-settingframeworkisverymuchfocusedonensuringtherightincentivesareinplacetoencouragetaxpayerstopaytherightamountoftaxattherighttime.Theunderpaymentrateattemptstoreflectthefactthatthe governmentisaninvoluntaryandunsecuredlender,andisunabletoassesstheactualcredit-worthinessofeachtaxpayer.TheoverpaymentrateisdesignedtodiscouragetaxpayersfromusingIRasaninvestmentopportunity.

TheunderpaymentUOMIrateissetusingtheReserveBankofNewZealand(RBNZ)floatingfirstmortgagenewcustomerhousingrate,plus250basispoints.4TheoverpaymentrateisbasedontheRBNZ90-daybankbillrate,minus100 basispoints.LinkingUOMIratestoRBNZratesensuresthattheUOMIratesreflectoverallmovementsinmarketinterestrates.ThecurrentUOMIratefortheunderpaymentoftaxis8.4%perannum,andfortheoverpaymentoftaxis1.75%perannum.Thereisasignificantdifferentialbetweentheunderpaymentandoverpaymentratesof6.65%.

  • Initial latepayment penalty–1%isaddedon the dayafterthe due datethen a further4% is addedto theunpaidtaxandthelatepayment penaltyalreadyimposedat theendof the seventhdayafterthe due date;and
  • Incremental latepayment penalty-1% isaddedthe dayaftertheendof themonthfollowing theimposition of the initial latepayment penalty.Theincrementallatepayment penaltyis calculatedbasedon the unpaidtaxand any latepayment penaltiesalreadyimposed.

3Shortfall penalties that can applycanbebetween 20% to150% of theunpaidtax.

4Thecurrentmethodin setting theunderpaymentUOMIratewasintroducedin 2009.Priorto that, the ratewassetusing theReserveBank of NewZealand90-daybankrateplus450basis points.

Thisdifferentialhasremainedrelativelyconsistentovertheyears.Thetablebelow

summarisestheUOMIratesfortheunderpaymentandoverpaymentoftaxoverthelast8years.

Theintendedresultoftaxpoolingwassummarisedasfollows:

HOWPOOLINGWOULDWORK

PoolTaxpayers

Taxpayer1Taxpayer2

7Jul01

7Nov01

7Mar02

Totaloverpayment

$15,000

$5,000

overpayment

$5,000

overpayment

$5,000

overpayment

Totalunderpayment

$15,000

$5,000

underpayment

$5,000

underpayment

$5,000

underpayment

7Jul01

7 Nov01

7Mar02

$637.40

7%/$1,487.2610%/$2,124.66

Why introduce tax pooling?

In2001theGovernmentreleasedadiscussiondocument,“Moretimeforbusiness”,whichlookedattaxsimplificationfromthepointofviewofsmall

Govtrate5.74%12.62%Govtrate

businesses.Thediscussiondocumentconsideredanumberofoptionsforsimplifyingtheprovisionaltaxrulestogivetaxpayersmorecertainty,andto

minimiseexposuretoUOMIwhilestillincentivisingtaxpayerstopaythecorrect

amountoftax.

IRDpays

$1,219.55

Interest

NoPool

IRDreceives

$2,681.32

TheproposalsweredevelopedinresponsetosustainedconcernsaboutthepenalimpactofUOMIfromorganisationssuchastheInstituteofCharteredAccountantsofNewZealand(asitwasthen).

Taxpoolingwasoneoftheoptionsproposedinthediscussiondocument.Taxpoolingwasexpectedtoallowbusinessestopooltheirprovisionaltaxpaymentstogethersothatunderpaymentsbysomeinthepoolcouldbeoffsetagainstoverpaymentsbyothersinthesamepool.

Intheexample,Taxpayer1whooverpayswouldhavereceived$1,219ofUOMIfortheiroverpaymentfromIR,butinsteadreceives$1,487fromtheIntermediarybypayingtheirprovisionaltaxthroughtheIntermediary.

Taxpayer1isbetteroffby$268.Taxpayer2whounderpayswouldhavehadtopay$2,681ofUOMItoIR,butinsteadpays$2,124totheIntermediary.Taxpayer2isbetteroffby$557.

TheIntermediarywouldgain$637fromtheopportunitytomanagethearbitrage

betweenthoseinapoolwhooverpayandthosewhounderpay.

Taxpoolingwasimplementedaspartofthetaxsimplificationmeasuresundertakenin2002.

Policy rationalefortaxpooling

Officialsacknowledgedthattheprovisionaltaxrulesoftenresultedinuncertaintyforbusinessesastheyoperateonthepremisethatbusinessesareabletocorrectlyestimatetheirincomefortheyear.Theresultofnotgettingtheestimationrightwillmeanthetaxpayeroverpaysorunderpaystheirtaxfortheyearbothofwhichhavefinancialconsequencesforthebusiness.

Overpaymentofprovisionaltaxresultsinmoneythatabusinesscoulduseintheirbusinesstobe“deposited”withIRatacosttothebusiness.Underpaymentofprovisionaltaxmeansbusinesseshavetofaceanunexpectedinterestcharge(UOMI).Thisissueisfurtherexacerbatedinthatmanytaxpayersconsiderthat theUOMIrateforoverpaymentistoolow(i.e.doesnotadequatelycompensatethebusiness)andtherateitchargesonunderpaymentistoohigh.

ChangingtheUOMIwasnotafeasibleoption...

ItislikelythatreducingtheUOMIratedifferential(forexamplereducingtheunderpaymentrate)wouldhavealleviatedsomeoftheconcernsraisedbytaxpayersinrespectoftheapplicationofUOMI.

However,inthe2001discussiondocumentdismissedachangetotheUOMIratesasitwasconsideredtobeunworkable.Inparticular,itemphasisedthattheunderpaymentrateneedstobesethighenoughsothatthereareappropriateincentivesinplacetoensuretaxpayerspaytherightamountoftaxattherighttime.Itwasfurthersuggestedthatiftheunderpaymentratewasreduced,anadditionalpenaltymayberequiredtoapplytounderpaymentstoensuretherightincentivesareinplacetoencouragecompliancefromtaxpayers.

AlthoughachangeofUOMIwasswiftlydismissed byIR,theTreasuryhassubsequentlyquestionedtheefficiencyofusingtaxpoolingasawaytoaddresstheperceptionofhighUOMIunderpaymentratesanduncertaintyindeterminingprovisionaltaxobligations.ItinsteadfavouredareviewoftheUOMIandprovisionaltaxregimeswithaviewtomakingitmorecertainandacceptabletotaxpayerstherebyremovingtheneedforataxpoolingregime.

…thereforetaxpoolingwasintroduced

TaxpoolingwasintroducedasawaytoprovidesomereliefofthefinancialimpactUOMIruleshaveonbusinessesasaresultoftheuncertaintytheyfaceintryingtoestimatetheirprovisionaltaxliabilitywithoutchangingtheUOMIrates.TheUOMIcostsfacedbytaxpayerswhoparticipateintaxpoolingwasexpectedtomorereadilyreflectthetruecommercialcostofborrowingorlendingbythetaxpayerconcerned.

Inshort,taxpoolingwasintendedtoprovideanopportunityfortaxpayerstomanagetheirtaxpaymentrisks.Itwoulddosobyallowingbusinessestopooltheirprovisionaltaxpaymentswiththoseofotherbusinesses,withtheresultthatunderpaymentswouldbeoffsetbyoverpaymentswithinthesamepool.

TheGovernmentalsoexpectedtobenefitfromtheintroductionoftaxpooling.Inparticular,thegovernmentwouldbeseentohavetakenaconcretesteptoaddressconcernsovertheUOMIinterestratesettingprocess,byopeningupanopportunityfortaxpayerstoreducetheircosts.ThesustainabilityofthethenUOMIratesettingprocesseswouldalsobestrengthened.

Tax poolinghasevolved overtime

Whilethepolicyrationalefortaxpoolinghasremainedthesame,anumberofchangeshavebeenmadetotheregimesinceitsintroductionin2003.Inparticular,areviewofthelegislationapplyingtotaxpoolingintermediarieswasundertakentoensuretheruleswereworkingasintended.Asaresultofthereviewanumberofamendmentsweremadetothetaxpoolinglegislationin2009andin2011.

Thechangesinclude:

  • extendingtaxpoolingtoreassessments(includingreassessmentthatariseasaresultofavoluntarydisclosureortheresolutionofadispute)
  • extendingtaxpoolingtovoluntarydisclosuresforcertainnon-incometaxobligations(i.e.GST,PAYEorFBT)wherenopreviousassessmenthasbeenmade
  • providingdiscretionforIR(i.e.theCommissioner)toallowtaxpayerstousetaxpoolingforcertainincometaxorRWTvoluntarydisclosureswherenoreturnhaspreviouslybeenfiled
  • enablingpoolingfundstobetransferredbetweenintermediaries
  • allowingalltaxpayerstomakedepositsintotaxpoolingaccounts
  • extendingthetimelimitavailabletosatisfyanobligationtopayprovisionalorterminaltaxto75days(notethatforreassessmentsthetimelimitremainsat60daysfromthedateofthereassessment)
  • removingthistimelimitformeetingprovisionalorterminaltaxobligationswhentaxpayersusetheirowndepositedfunds,providedthereturnwasfiledontime.

Inadditiontothisgeneralreviewofthetaxpoolinglegislation,IRalsoconductedaspecificreviewoftheoperationoftheCommissioner’sdiscretiontoallowtheuseoftaxpoolingfundsforcertainincometaxorRWTvoluntarydisclosureswherenoreturnhaspreviouslybeenfiled.Thereviewconcludedthatthediscretionisoperatingasintendedandshouldberetained.

Howtaxpoolingoperates

Taxpoolinggenerallyinvolvesataxpayerdepositingmoneywithataxpoolingintermediary.Thedepositsearninterest.TheintermediarydepositsthatmoneyinitstaxpoolingaccountwithIR.Thetaxpayermayusethefunds(deposits)inthefuturetosatisfytheiroutstandingtaxliabilitiesormaysellthefundstoanothertaxpayerwhoisalsoaclientofthattaxpoolingintermediary.Thefundsremaininthetaxpooluntilthetaxpayerdirectstheintermediarytotransferthefundstothetaxpayer’sownIRaccountortoanothertaxpayer’sIRaccount.Thetaxpayermayalsorequestforthefundstoberefunded.Ifthetaxpayersellsthefunds,theintermediarywillfacilitatethesaleforafee.Onthepaymentofthefee,theintermediarytransfersthefundstotheothertaxpayer’sIRaccount,asatthedatethemoneywasoriginallydepositedwiththeintermediary.

Thediagrambelowprovidesasimplifiedviewofthetaxpoolingregime:

Inthisexample,TaxpayerAhasdeposited$100kintothetaxpoolingintermediary’strustaccount.Theintermediary(throughtheuseofatrustee)depositsthemoneyintotheintermediary’staxpoolingaccountsetupwithIR.TaxpayerAtheninstructstheintermediarytosellitsexcesstaxasithasoverpaid.

TaxpayerB,whohasunderpaiditstax,instructstheintermediarytopurchasetaxinordertomeetitsobligationwithIR.Theintermediaryfacilitatesthetransaction.Oncethetransactioniscompleted(i.e.TaxpayerBpaysthe$100kandfee)the$100kinthetaxpoolingaccountistransferredtoTaxpayerB’sIRaccountasatthedatethatTaxpayerAdepositedthe moneywiththeintermediary.

Thereareanumberofspecificrulesandprovisionsthatlimittheuseofthetaxpoolingfunds.Oneofthekeyrestrictionsisthattaxpayersmustaccessfundswithin75daysoftheirterminaltaxdateinordertoapplytaxpoolingfundsagainsttheirprovisionalorincometaxliabilitiesasattheeffectivedateoftheoriginaldeposit.Thetimelimit isreducedto60daysiftheincometaxliabilityrelatestoareassessment.Notethatthereisnotimerestrictionifthetaxpayerisusingtheirowndepositedfundsandtheyhavefiledataxreturn.

How tobecomea taxpoolingintermediary

ApersonthatwantstoactasataxpoolingintermediarymustfirstgetIR’sapproval.Thepersonmayonlyapplytobeataxpoolingintermediaryiftheyarefittoapply.Thismeanstheperson(orofficerorprincipal)mustnotbeadischargedorun-dischargedbankrupt;norhavebeenconvictedofanoffenceinvolvingdishonesty;andmustbeeligibletobeacompanydirector.5

5Tax Administration Act1994,section 15R.

AlthoughIRisrequiredtoapprovetaxpoolingintermediaries,itisundernoobligationtooverseeoraudittheoperationoftaxpoolingaccountsandisnotliableforanylosssuffered bythetaxpayeriftheaccountisnotproperlyoperated.6

InapprovingtaxpoolingintermediariesIRmustbesatisfiedthattheapplicantcanoperatethetaxpoolingaccountcorrectlyandwilloperatesystemsthatwillallowittomakepaymentsandprovideinformationintheformatrequired byIR.7ThismeansIRmust besatisfiedthattheapplicanthastherequisitesystemsinplacetoprotectpersonalinformationandpaymentdetails,whichareobtainedinthecourseofrunningthetaxpoolingaccount,andtokeeparecordofeachtaxpayer’sbalanceintheaccount.8

Intheirapplicationtheprospectiveintermediarymustundertaketoinformthetaxpayer,beforeactingasintermediaryforataxpayer,ofIR’sroleinrelationtotaxpoolingandthatitisfittooperatethetaxpoolingaccountusingtheappropriatesystem,outlinedabove.9

TheintermediarymustalsoconfirmtoIRthatitwillestablishatrustaccountintowhichitwillpaytheamountsreceivedinitsroleasintermediary.Theamountspaidbytaxpayersareheldontrustbytheintermediaryuntiltheyaretransferredoutofthepool,whetherthisistoanotherIRaccountorrefundedtothetaxpayer.

Ceasingtobeatax pooling intermediary

Althoughtheintermediarymaywinduptheaccountattheirdiscretionatanytime,IRonlyhasthepowertorequireanintermediarytowinduptheirtax poolingaccountiftheintermediarydoesnotmeetcertainconditions.

IRmayrequiretheintermediarytowindupitstaxpoolingaccountif:

  • Thetaxpoolingaccounthasgoneintodeficit

  • Theintermediary’sactionsarepreventingataxpayerfromeffectivelymanagingtheirliabilitiestopayprovisionaltaxandUOMI
  • Theintermediaryhasbeenputintoliquidationorreceivership
  • Fewerthan100taxpayersareusingthepoolingaccountorarelikelytobeusingthepoolingaccount
  • Theintermediaryhasbreachedanyoftheirobligationstoestablishandmaintainataxpoolingornolongermeettherequirementstobefittooperate ataxpoolingaccount(asoutlinedabove).

IRmayrequirethepoolingintermediarytobewoundupimmediatelyormaysetafuturedateforthewindup.

Onthewindingupofataxpoolingaccount,IRmayrefundthebalanceoftheaccounttotheformerholderoftheaccount(i.e.thetaxpoolingintermediary)orapplytothecourtsfordirectionsonthedisposalofthebalanceoftheaccount.10

6Tax Administration Act1994,section 15P.

7Tax Administration Act1994,section 15S(2).

8Tax Administration Act1994,section 15S(1)(b).

9Tax Administration Act1994,section 15S(1)(d).

10Tax Administration Act1994,section 15T(4).

Keyplayersinthetaxpoolingindustry

Thenumberofintermediarieshasgrownsincetaxpoolingwasfirstintroduced.Itisexpectedthatfurtherplayerswillcontinuetoenterthemarket.

Currently,therearesixtaxpoolingintermediariesapprovedbytheIR.Theyare:

  • TaxManagementNewZealandLtd(TMNZ)
  • TaxPoolingSolutionsLtd(TPS)
  • ProvisionalTaxFinanceLtd(PTF)
  • ElectronicTaxExchangeLtd(ETX)
  • TheNewZealandTaxTradingCompanyLtd(NZTTC)
  • BaileyIngham.

Fiveoftheintermediariesoperateascompaniesandtheyappeartoonlyprovidetaxpoolingservices.Themajorityoftheintermediarieshaveexecutiveteammembersthathavehadpreviousexperienceintaxorinbankingandfinance.

Transactions offeredbythepooling intermediaries

Thefollowingtableoutlinesthetransactionsprovidedbyeachintermediary:

ServiceTMNZNZTTCPTFTPSETX

DepositYesYesYes*Yes*Yes* Sale/PurchaseYesYesYesYesYes

FinanceYesYesYesYes“Coming

soon”

SwapYesNoYesNoNo

*Theseintermediariesofferthisservicebutdonotseparatelymarketit.Thetransactionsprovidedarebrieflyexplainedbelow.

TaxDeposit

Taxdeposit,whilemarketedasaseparateservicebysomeoftheintermediaries,isthekeyinitialstepthattaxpayersmustundertakeiftheywishtoselltheirexcesstaxpayments,asonlyfundsdepositedwithanintermediarymaybesold.

Ineffecttaxdepositsaretaxpaymentsmadeintoanintermediary’staxpoolaccountinsteadoftoIRdirectly.ThetaxpayercanthenrequestthesefundstobetransferredfromthetaxpoolingaccounttotheirownIRaccountsandsellanysurplusfundsthroughthetaxpool.

Thebenefitofthedepositschemeistheflexibilitythetaxpayerhasovertheirprovisionaltaxobligations,andtheaccesstomorepreferentialinterestratesascomparedwithUOMI.Anadditionalbenefitofdepositingfundswithanintermediaryisthatthetaxpayerisabletorequestarefundoftheiroverpaymentatanytime,comparedtohavingtofileataxreturnbeforeobtainingarefundofanyoverpaidtaxfromIR.

TaxSale/Purchase

Taxsalesandpurchaseswerethekeytransactiontypesenvisaged byIRwhentaxpoolingwasfirstintroduced.Thatis,theabilityforataxpayerwhohasunderpaidtheirtaxfortheyeartopurchasethetaxfromataxpayerwhohasoverpaid.

Insummary,apurchasewilloccurwhenthetaxpayerhasunderpaidtheirprovisionaltaxliabilityasthetaxpayerbenefitsthroughreducingtheinterestpayableontheunderpaidtaxliability.Taxpayersmayalsopurchasetaxiftheyhaveunderpaidothertypesoftax(includingincometax,GST,FBTandPAYE)undercertaincircumstances.

Asalewilloccurwhenthetaxpayerhasoverpaidtheirprovisionaltaxliabilityasthetaxpayerbenefitsbyreceivingahigherrateofinterestontheiroverpaymentcomparedto1.75%offeredbyIR.

TaxFinance

Whenataxpoolingintermediaryfinancesataxpayment,iteffectivelyallowsataxpayertoselectadate(orperiod)aftertheprovisionaltaxduedatetopaytheirprovisionaltaxinstalment.Thetaxpayerpaysafinancechargeupfrontandtheintermediarymakesadepositequaltotheamountfinancedintothetaxpoolingaccount.Thatdepositisfundedfromintermediariesownfundsorvialinesofcreditestablishedwithotherfinanciersforthatpurposes.OntheagreeddatethetaxpayerpaystheintermediarythefinaltaxdueandtheintermediarytransfersthetaxdepositintothetaxpayersIRaccount.

TaxSwap

Whereataxpayerhasoverpaidatoneprovisionaltaxdateandunderpaidatanother,thetaxpoolwillallowthemtoswapthepaymentsbetweenprovisionaltaxdatesorwithanothertaxpayerinordertoeventhepaymentsoutacrossthedifferentdates.Thisenablesthetaxpayertooffsetinterestchargesandeitherincreaseorreducetheamountofinterestpayable/receivable.

Theabilitytousetaxswapdependsonwhetherthetaxpayerhasbeendepositingtheirtaxpaymentsintoataxpoolingaccount,andwhetherthereistaxavailableatthosedates.Thisisessentiallyacombinationofasaleandapurchase.