HOW TAX POOLING WORKS
Tax pooling is a progressive approach to provisional tax management. The tax pooling system is based on taxpayers who pay provisional tax into a ‘pool’ at Inland Revenue. Once taxpayers know exactly what they need to pay in provisional tax, they transfer this out of the pool to their Inland Revenue account and sell any surplus to someone else (typically for a fee greater than the Inland Revenue credit interest rate they would otherwise receive).
A taxpayer faced with an underpayment can then acquire those surpluses for a fee less than the Inland Revenue debit interest rate. When these surpluses are transferred from the pool to the taxpayer’s Inland Revenue account it is like a transfer from a related party, so Inland Revenue considers it a payment made on time and therefore there is nothing further to pay. Any interest or late payment penalty charges on the taxpayer’s account are usually eliminated at the same time.
Surpluses can be acquired from the pool whether you put tax into the pool or not. Surpluses can only be sold if they’ve been deposited into the pool intially.
Acquisition of additional tax can be done in advance (finance) or after the provisional date (buy), and surplus tax can either be sold over time (sell) or refunded within a matter of days.
For a simple overview of tax pooling, watch this brief video:
Buy overpaid tax and save
If you’re faced with an underpayment you can acquire a tax surplus from our pool for a fee less than the Inland Revenue debit interest rate.
Your surplus tax is worth something
If you’ve overpaid tax let us sell it and get you a better deal. We make it easy to switch from your current provider. Talk to us before you sell to make sure you are getting the best deal.
Pay through us for better returns
More interest on surplus tax, faster refunds and covering missed non-income tax payments are just some of the benefits when you make deposits with us.
Get tax finance to suit your cash flow
With feeGuard, if you finance too much tax, we’ll give back the full finance fee on any tax that’s not required.
HISTORY OF TAX POOLING
When Inland Revenue introduced the provisional tax regime, there were no penalties or interest costs if you paid late. So that’s what most people did. This prompted Inland Revenue in 1987 to impose an interest rate regime that would encourage compliance. People were charged high interest rates (currently 7%) when they underpaid or late paid, but only received low interest rates (currently 0%) when they overpaid. The big criticism of this framework through the 1990s was that it made no distinction between the relative business risks of whether a taxpayer would actually pay, and the taxpayer’s compliance history.
New system (2003)
The challenge was that Inland Revenue was not well placed to manage different interest rates for different taxpayers. They recognised that it was the private sector that was better able to provide and maintain this degree of flexibility, and so in response to this Inland Revenue introduced tax pooling, a public/private solution to a shared problem. Inland Revenue wanted to retain the incentive structure of its interest regime but provide accommodation to compliant taxpayers. Meanwhile taxpayers wanted a less costly and more flexible means of complying with their obligations, and tax pooling intermediaries could provide that.
Inland Revenue put the framework in place for intermediaries such as Tax Traders to facilitate settlements between taxpayers. Taxpayers end up better off because they can obtain more interest on overpaid tax and have outstanding tax obligations satisfied at a lower cost than they otherwise could. Meanwhile Inland Revenue is happy because outstanding tax debts are satisfied. Rather than refund old payments and receive new ones, they simply allow an existing payment to be applied elsewhere.
The relevant legislative provisions governing tax pooling can be found primarily in sections RP17 - RP21 of the Income Tax Act 2007, and sections 120OD, 120OE and sections 124S to 124X of the Tax Administration Act 1994. Additional references relating to imputation can also be found in sections OB and OP of the Income Tax Act 2007.