Amanda Morrall talks to Liz Taylor about tax pooling arrangements and how they can help underpayers save on interest, penalties or buy time to pay

By Amanda Morrall

April 7 looms large for thousands of individuals and businesses owing tax.

Those who fail to meet their tax obligations on time risk getting charged 9% with additional penalties.

To ease the burden, late payers can use a tax intermediary who has at their disposal pooled tax dollars sold at a rate lower than what Inland Revenue charges and loaned out at a below standard borrowing charges.

Tax Management New Zealand's Liz Taylor said the average late-payer can save themselves about 25% using a tax intermediary, depending on how much they owe and how stale their tax debt is. Conversely, over payers, typically large corporations, can earn up to 2.5% interest for putting more in the tax kitty than they owed.

Taylor explains: "The way we do that is by bringing parties together who have overpaid and underpaid and then reducing the margins. You have the IRD rates, and then our rates so you're either paying less or receiving more."

Taylor said the overpayers hesitate to pay the 9% underpaying rates because their funding rates are between 3-5%. As a result, they overpay, usually by a hefty amount, to avoid the penalty and also earn interest.

"Because their fund is in the tax pool, we can then bring to the party people who have underpaid through no fault of their own (or whatever their circumstances were) and then match these parties together. In doing so we reduce the margins and exposure for each. We increase it for the seller and reduce it for the payer.''

Tax intermediaries are relatively new to New Zealand. They came onto the scene in 2003 at the behest of Inland Revenue in an attempt to improve tax repayment records.

Due to commercial sensitivities, Taylor declined to say how much of the IRD tax pool was under Tax Management New Zealand's control save to say it was "substantial", unsurprisingly when you consider that many of New Zealand's top 200 companies pay their tax into the tax pool, she added.

"The amount of tax which can be purchased for any single transaction is dependent solely on the amount of tax there is available for sale.  There is no minimum purchase either."

In 2008, New Zealanders who were shirking, deferring or dodging their taxes were believed to number anywhere between 200,000 and 300,000. Between them they were estimated to have debts with the Inland Revenue Department of NZ$4 billion.

In its 2009 report, the Auditor General warned that staggering amount could easily double in five years, outpacing Inland Revenue's ability to deal with the tax debt monster. (See Amanda Morrall interview with tax broker Fiona Whyte here).

Growing business

Tax Management New Zealand is one of three tax intermediaries, however growing pressure to recoup unpaid tax could see more parties enter the field soon.

Taylor said the size of the tax pool varied from year to year depending largely on the health of the economy.

"In 2003, the overpayments were a lot more because large companies were putting in buffers upwards of 10% so that was very useful for purchases. These days with the global financial crisis (GFC) people are pulling back a little bit more on that buffer so it goes in swings and round abouts.''

Although the service is open to anyone in tax arrears, Taylor said the main buyers of tax were small and medium size businesses facing cash flow problems.

Those really stretched for tax dollars also have a facility to borrow from the tax pool at a discounted rate from what they'd pay on the open market.

"Tax finance differs in that the clients borrow the funds, solely for the provision of tax and what happens is the tax they need to pay is paid into the IRD account and the client decides how long they want to defer repayment, so they have some breathing space.''

The amount of tax that can be financed to cover a provisional tax payment has varied from the $5,000 minimum to over $5 million.  The average customer is an SME financing in the $10,000 - $50,000 range, said Taylor.

The maximum time for repayment is set at 12 months.

Customers pay up to 8% interest

Taylor said it was a particularly useful option for contractors or small businesses with seasonal revenue. The interest rates for borrowing varied but were typically between 6.5% to 8% depending on where the money was being sourced.

Because tax intermediaries are heavily regulated by Inland Revenue, their lending requirements are not as stringent as other creditors. For instance, tax finance arrangements made through an intermediary are not subject to credit approvals.

"The reason for that is that their debt is with the IRD because the money is paid into the IRD and so if the client doesn't meet the payment at the end, the lender just receives their funds back from the IRD, so it reverts back a debt between to the client and the IRD.''