The Government is changing how it adjusts use-of-money interest (UOMI) rates, moving away from a ministerial process to a determination issued directly by the Commissioner of Inland Revenue (IR).
The change is tucked away in the Taxation (Annual Rates for 2025–26, Compliance Simplification, and Remedial Measures) Bill currently before Parliament.
It has the potential to materially affect how quickly UOMI rates respond to changes in market conditions.
At present, changes to UOMI rates require an Order in Council.
In practical terms, that means IR officials prepare a Cabinet paper, the Parliamentary Counsel Office drafts the regulations, the proposal goes through the Cabinet Legislation Committee, and final approval is given by the Executive Council.
From start to finish, the process typically takes six to eight weeks.
There is also an informal convention that UOMI rates are only reviewed when the underlying benchmark moves by 1% or more.
Under the proposed changes, the Commissioner of IR will set UOMI rates by determination.
There will be no Cabinet paper, no regulation drafting cycle and no Executive Council approval. Instead, the Commissioner will review Reserve Bank of New Zealand (RBNZ) data, calculate the relevant rates and publish the determination.
The existing formulas will continue to apply in terms of setting the rates:
A minimum lead time of one month will apply before the next provisional tax instalment date.
Any new rates will take effect from the next instalment date that falls at least one month after the Commissioner’s determination.
Clause 192 of the Bill revokes two sets of regulations:
The UOMI rate setting formulas will instead be incorporated directly into the Tax Administration Act 1994 under new section 120H.
A further new provision, section 227I, preserves the current UOMI rates – 8.97% for underpayments and 2.25% for overpayments – until the Commissioner’s first determination takes effect.
This is a positive step and signals a move towards more responsive, real time rate settings.
We’ve seen the consequences of delay in the past. In 2024, the Official Cash Rate was cut by 1.25% between August and November, yet IR’s UOMI underpayment rate moved by just 0.03%. For months, taxpayers were exposed to interest rates that did not reflect prevailing market conditions.
Whether the Commissioner’s new powers result in more timely rate adjustments remains to be seen.
But in a dynamic economic environment, removing unnecessary delays from the system is a sensible move.