Tax pooling strategies to free up working capital in a low interest environment

 Maddy Green (left), Client Director

By Tim Kirkpatrick, Co-CEO at Tax Traders 

Market interest rates have fallen on the back of a series of cuts to the official cash rate by the Reserve Bank of New Zealand (RBNZ) during the second half of 2024 and are expected to continue their downward trajectory when the RBNZ meets for the first time this year tomorrow (Wednesday 19 February 2025). 

While business conditions remain challenging, commentators are optimistic that low interest rates could be the catalyst to provide a much-needed jumpstart to our sluggish economy.  

That optimism brings hope. And hope, in turn, brings opportunities.  After all, any uplift in economic fortunes can present new opportunities for your clients’ businesses to grow, flourish and ultimately thrive.  

When opportunities arise, however, it is paramount that your clients have the necessary funds on hand to capitalise. So, as we venture towards the cusp of a more prosperous economy, ask yourself: How can you utilise tax pooling to assist your clients with their working capital requirements as economic conditions improve? 

Working capital is the amount of cash and liquid assets your client’s business has available to meet its current and short-term expenses. What that really distils down to, though, is how much cash (either actual or headroom on banking facilities) does your client have on hand.  

Let’s explore how the tax pooling framework – which has been operating in New Zealand with the approval of Inland Revenue since 2003 – can complement your clients’ treasury function in managing business financing and debt, so that your clients can capitalise on future opportunities. 

Payment flexibility frees up cash flow 

A big advantage tax pooling offers your client is the ability change the timing of upcoming provisional tax payments to match their cash flow. This can be done by using Tax Traders to defer upcoming provisional tax payments to a time in the future that suits them. 

Rather than your client being exposed to use-of-money interest (UOMI) and late payment penalties from Inland Revenue (IR), your client pays the lower interest rates offered by Tax Traders.  

For your clients who want to utilise money set aside for tax more productively in their business, there are a couple of payment options from which to choose: 

• Interest upfront arrangement: This sees your client pay an interest cost at the time they set up the arrangement and the tax amount at an agreed future date, so long as that date is not more than 75 days beyond their terminal tax date for that year. 

• Single payment arrangement: This sees your client make one payment comprising the tax amount, plus interest, at a time of their choosing, subject to the same 75-day deadline above. Your client also has the option to smooth out cash flow by paying in instalments.  
  

Choosing the right option for your client 

Which arrangement suits your client depends on whether they want certainty or flexibility.  

A great way to explain things to your clients is to have them think of it like their mortgage: Would they prefer a fixed rate, or would they rather have a floating rate? 

Interest upfront 

An interest upfront arrangement is like fixing a mortgage. 

It provides certainty as your client is locking in an interest rate in advance. The interest amount your client pays is based on the tax amount they require and the date in the future they wish to pay.  

That makes an interest upfront arrangement a more cost-effective way to manage tax payments. In this current decreasing interest rate environment, that is particularly the case for arrangements longer than six months as forecasts for long-term interest rates are more attractive than current rates and committing to this fixed term gives your client access to these lower rates now. 

Of course, that certainty and lower interest rate does come with some trade-offs.  

Should your client not require the entire tax amount held on their behalf in the tax pool, they would not be able to request a refund of the upfront interest cost on the portion of unused tax. The same applies should your client decide to settle the arrangement earlier than originally expected. 

Another thing to note is the interest cost your client pays will not be impacted by any unexpected market interest rates decreases during the duration of their arrangement. 

Single payment 

A single payment arrangement is like choosing to float a mortgage.  

It would suit clients who want flexibility or prefer to take a ‘wait and see’ approach rather than paying an interest cost upfront.  

Under this arrangement, your client can modify their payment date and/or the tax amount. So, if your client decides to settle their arrangement early or only requires a portion of the tax amount, then the interest cost they pay will reflect that.  

To access this flexibility, your client will incur a slightly higher interest cost. Depending on when it is setup, the interest payable under a single payment arrangement will also increase/decrease relative to the rates in effect today as the interest rate market, including the IR UOMI rates, fluctuates over the years ahead.  

Key takeaway

An interest upfront arrangement allows your clients to secure a lower interest rate – but provides less flexibility. A single payment arrangement offers your client more payment flexibility, albeit at a slightly higher interest cost.  

So, you and your client will need to consider these differences when weighing up which payment option is best for them.  

What if my client just wants to pay their tax on time? 

Any clients wishing to pay their provisional tax on time should deposit their tax with Tax Traders. 

Depositing into Tax Traders’ tax pool provides flexibility over these funds that can assist from a cash flow perspective if circumstances change in the future.  

Your clients are able to withdraw these payments should they need to pull cash back into their business (as opposed to having these payments held at Inland Revenue until the tax return is filed). They also can use their tax deposits as collateral to secure affordable short-term working capital, subject to anti-money laundering checks.  

As the economic outlook starts to become more positive, tax pooling offers an array of tax payment options to suit all businesses looking for cash flow flexibility, all while mitigating UOMI and late payment penalties. 

If you have any questions, feel free to reach out to the team at Tax Traders. We’re ready and happy to assist you and your clients.  

Tim Kirkpatrick is the Co-CEO of Tax Traders, the most preferred* tax pooling provider in New Zealand. 

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. 

*Based on an independent national survey of accountants who use tax pooling.