Let's say you've got $10k of GST or Income tax due, and it's unlikely you're going to be able to pay it on time. What does this mean? Even worse, what if you've found a tax payment letter from your accountant dated a year ago that you haven't gotten around to?
I know, who still sends letters??
Paper jokes aside, this is bad right? Right!
At the moment, the IRD charges interest at 8.4% on outstanding balances. Compared to interest rates you're likely to get from the bank, that's pretty high! But the bad news doesn't end there with the IRD also likely to sting you with a 1% penalty ONE DAY after the tax is due, and another 4% a week after it is due, and another 1% each month the tax isn't paid.
Suddenly they IRD has done an amazing magic trick, due to penalties compounding, it's made the 8.4% interest rate disappear and replaced it with a ugly 28% interest rate (approx) .
The $10k bill has now increased by over $2,800 over the year, or ~$50 per week.
You really don't want to be in debt to the IRD
A missed tax payment won't just set off alarm bells with us, you may find yourself more likely to be "randomly" selected for an audit. The IRD uses "risk factors" to select participants for tax audits, of which late payment is one.
Late filing is even worse!
Late or non filing of returns means you may be charged a late filing fee of between $50 and $250
What can you do if you're already up the creek?
For some tax types, an IRD approved tax management service may be able to "sell" you some tax credits for less than the cost of IRD penalties and interest.
You can also be up front with the IRD and request a payment arrangement. We can assist with this.
What can you do to avoid this in future?
Knowledge is power. Knowing the frequency of your GST and income tax payments is vitally important to start.
Printed tax calendars are helpful, but we prefer to use online calendars wherever possible. It's our practice to send important tax dates directly to the most important calendar = your calendar!
Clients in more fluid businesses like to keep a certain % of their invoices received in a separate bank account to save for tax. You can calculate the % required by adding GST together with an average tax rate - this usually comes out to between 30% and 40% of the total invoice. This then goes into a separate bank account for clarity and checking to your GST account.
Firm but Fair
Sometimes there are good reasons why tax hasn't been paid and we've always found the IRD to be receptive to hearing these. The IRD may remit penalties if you've a good reason, but they won't suffer fools so it's far better for you and your business to be proactive. Talk to us about how we can help!