Tax Pooling
What is tax pooling?
Tax pooling allows taxpayers to pool provisional tax payments
and offset under and overpayments to increase the return on
overpayments and reduce UOMI exposure on underpayments.
Most businesses pay provisional tax in three equal
instalments. The amount of these payments is based on the
estimated profit for the current financial year and it can be
difficult to estimate them accurately. Many businesses either
underpay and pay use of money interest ("UOMI") of
8.89% to the IRD or overpay and receive interest of only 2.18% on
the overpayment.
Instead of making provisional tax payments directly to the
IRD, you deposit your tax payments into a pooling account
held at the IRD on behalf of an intermediary. The intermediary
offsets under and overpayments within its pool.
The cost savings generated by the offsetting are shared between
the overpayers, the underpayers and the intermediary. Overpayers
benefit because they are paid more than the UOMI the IRD would have
paid on the overpayment. Underpayers benefit because they pay
interest at a lower rate than the IRD's UOMI rate.
Once you have completed your tax return and
calculated your residual income tax, you can then:
- Transfer tax payments from the tax pool into your account
at the IRD to satisfy your tax payment obligations;
- Purchase additional tax from the tax pool at a rate lower than
the IRD's 8.89% UOMI rate; or
- Sell your overpayments at a rate greater than the 2.18%
paid by the IRD.
Calculate your savings.