Tax pooling strategies for audits and voluntary disclosures

 

As Inland Revenue (IR) continues to go about its investigation activities at an ever-increasing pace, Tax Traders thought it would be beneficial to outline the extent to which we can help your clients.

In this article, we share some tax pooling strategies to reduce interest exposure if your clients are among those who IR is investigating.

These strategies will be worth keeping in mind as IR returns to its tax compliance work that was effectively on pause during the final stage of its Business Transformation project and the Covid pandemic response. Tax Traders is noticing an increase in the number of voluntary disclosure filings, as well as many taxpayers engaging early and taking proactive positions, since IR was allocated $29 million in Budget 2024 to target taxpayers who have shirked their tax obligations.

But before unpacking these strategies, it’s pertinent to run the rule over tax pooling legislation as a refresher for which audit and voluntary disclosure situations Tax Traders can assist with.

Basic requirements

 

Tax Traders utilises the IR-approved tax pooling framework to allow your client to purchase backdated tax from another taxpayer who has overpaid and apply this against their liability. IR recognises that your client paid their tax on time once this transaction is completed, eliminating use-of-money interest (UOMI) and late payment penalties (if any).


For your client to use Tax Traders in an audit or voluntary disclosure situation:

  • A return for the tax type and period for which your client is being reassessed must have been previously filed, unless Commissioner’s discretion has been granted (see below).
  • Only the difference between the original and reassessed amount can be purchased.

If your client satisfies these criteria, then Tax Traders can assist with income tax, GST, withholding taxes, and employment-related taxes.

Your client has 60 days from the date a notice of reassessment is issued by IR to buy the additional tax they require from Tax Traders and have this transferred to IR on their behalf.

Don’t forget Commissioner’s discretion

 

In situations where a voluntary disclosure has been made, but no previous return for the tax type has been filed, the Commissioner of IR has discretion to allow your client to use Tax Traders.

Historically, this discretion was only granted for income tax and RWT – but in March 2022, this was widened to include the broader range of tax types noted above.

To be granted Commissioner’s discretion for voluntary disclosures, your client needs to meet certain criteria. Broadly speaking, IR must be satisfied that:

  • Your client has been taking reasonable care to comply with their tax obligations. The ‘reasonable care’ test is like that used when applying shortfall penalties. It involves establishing what a reasonable person would do in the same circumstances, considering the taxpayer’s age, health, and background.
  • The voluntary disclosure relates to a new liability, not a liability that arose from a return by your client or an assessment of your client.
  • The voluntary disclosure is made within a reasonable time after your client becomes aware of the new liability, and before IR has contacted them. ‘Reasonable time’ is generally around three months after the knowledge of any new tax liability, although this will be determined on a case-by-case basis by IR.
  • Your client notifies the Commissioner of the details of the new liability and the notification results in an assessment of the new liability or in an obligation to pay the new liability.

Based on what Tax Traders is seeing across our client base, there has been a reasonable uptake and success in gaining Commissioner’s discretion since it was broadened.

Key drivers for choosing the right strategy

So, if your client is in a scenario where they have an additional liability, you will need a strategy that reduces exposure, minimises risk and delivers the best outcome for your client.

 

No two audits or voluntary disclosures are the same. Some of the drivers in selecting a strategy that is right for your client will include:

 

  • The level of certainty you have over your client’s eventual liability and/or timeline.
  • Your client’s current and future cash position.
  • Impact of IR’s visibility over transactions.
  • The greater focus on minimising cost versus certainty of exposure on timing of cash flow.
  • Other factors such as interest deductibility or stakeholder visibility.

 

Tax Traders’ top three strategies

 

Strategy one: Buy at reassessment

 

Under this approach, your client waits until the reassessment notice is issued and then purchases the tax they require.

 

One of the key benefits is that IR has no visibility on the client's expected settlement position until the actual settlement occurs. Additionally, there is no upfront cash outlay required, as interest accrues until the settlement date.

 

However, given market pricing for tax credits fluctuates based on supply and demand of tax, there is a degree of uncertainty as to the overall exposure of the increased liability. The interest payable will also accrue until the date of purchase.

 

An additional benefit is there is unlikely to be a timing mismatch between the cash outflow for tax pooling interest and the tax deduction. Tax Traders’ interest is deductible in the year the transfer of tax is processed by IR, providing some reassurance to clients.

 

Strategy two: Stop-the-clock deposit

 

Under this approach, client deposits funds into the Tax Traders tax pool to cover the reassessed tax liability.

 

This move stops any further interest accruing, provided the deposit covers the reassessed amount. Unlike locking in historic tax, which may not be required, this approach allows the tax to sit at more recent dates, making it potentially easier to sell if it is not needed.

 

Your clients benefit from the flexibility of using their deposit to satisfy current year income tax or liabilities for other tax types.

 

However, it's important to note that this method does not settle interest to buy the historical tax required. IR also has a level of visibility over deposits made into the tax pool.

 

Tax Traders offers additional advantages in these scenarios by potentially guaranteeing a sale rate for any tax that is ultimately not required. Furthermore, we may provide an upfront assurance on pricing for the transaction upon reassessment, providing certainty as to the interest exposure for purchasing the required tax.

 

Strategy three: Pre-emptive purchase

 

Under this approach, your client buys the tax they expect to need – but holds this in the Tax Traders tax pool until the reassessment is confirmed.

 

This allows your client to lock in market pricing at the earliest point in time, effectively limiting exposure to potential tax pooling pricing fluctuations. This strategy also ensures that IR has no visibility on the position you expect to settle until the actual settlement occurs.

 

However, this approach requires a full upfront cash outlay, placing the burden of holding costs on the client until the reassessment is finalised. It's important to note that Tax Traders’ interest is only deductible in the year the transfer is processed by IR.

 

Need something bespoke? Let Tax Traders bring the options to you

 

We’re happy to tailor tax pooling strategies to suit your clients’ unique requirements, so you can confidently manage audits or voluntary disclosures. Our team of experts can utilise modelling and scenario analysis to determine the optimal allocation of existing payments and the timing of top-up payments to determine the right strategy for your clients.

 

As audits or voluntary disclosures progress and circumstances can change, Tax Traders is committed to assisting with re-evaluating positions and adapting strategies accordingly.

 

By leveraging our tailored tax pooling services, you can confidently navigate complex situations while ensuring the most advantageous outcomes for your clients.

 

Why Tax Traders

 

At Tax Traders, we have the best technical knowledge in the market, with expertise across accounting, tax law, banking and tax pooling. Our strong relationships with IR officials ensure that we can help you navigate the complexities of audits and reassessments effectively.

 

We leverage market-leading technology to provide our clients with world-class service. Our comprehensive tax inventory base, which includes tax dating back to November 2011 is complemented by access to the corporate supply market, ensuring that we can meet all your tax needs efficiently and effectively.

 

If you have any questions or want to know more, please reach out to the Tax Traders team.

 

Disclaimer: The information in this article is Tax Traders’ general view, intended to provide enough information to inform you about this topic generally as at the date of the article, rather than comprehensive information for all situations. This article should not be relied upon to make decisions. Tax Traders recommends you seek professional advice as appropriate for your circumstances.