What is tax pooling?

What is Tax Pooling?

Alex Silverwood Business Strategy & Planning, Reducing Tax

If you’re like many businesses, paying tax can be difficult. Often it’s a question of whether to pay the taxman, or reinvest back into your business and make more money.

Tax pooling gives you the best of both worlds – you can pay when it suits you, your business and your cashflow.

In short, it gives you the option of paying later and avoiding penalties (5% of the tax owing), at a fair interest rate – around 6% at the time of writing this article, compared to IRD’s 8.22% or a bank overdraft at 12%.

Yes, it’s legal too. The IRD are in favour of it because it ensures a higher rate of collection than what they get without tax pooling.

Origins of Tax Pooling

Going back in time (pre-1987), there were no penalties or interest for late tax payments. The obvious outcome was that people didn’t pay their tax. What incentive was there to pay when there was no penalty for not paying?

To deal with this, the IRD introduced late payment penalties, and a high interest rate on underpayments.

They also introduced paying interest on overpaid tax (now at an exceptionally low interest rate…).

Thankfully, they eventually recognised that this penalty regime was harsh on people in high-growth businesses, or those with uncertain cashflow. They also realised that people with overpaid tax were getting a poor return on their money.

How Tax Pooling Works
  1. Tax poolers (like www.taxtraders.co.nz or www.tmnz.co.nz, both are approved by IRD) hold tax payments in their Trust Account on behalf of people who typically overpay their tax
  2. People who underpay tax “buy” the tax payment off the person who overpaid their tax
  3. The buyer pays 6% interest
  4. The seller receives most of this, with the tax pooler keeping some for their effort

Again, yes, it’s legal (and safe – all funds are held in trust). From the IRD’s perspective, they’re never out of pocket – it’s simply a swap of tax payments between someone who has overpaid, and someone who has underpaid.

Advantages of Tax Pooling

Just to recap, here’s why you’d use tax pooling:

  • Flexibility of when you pay your tax – you don’t have to make the payments on the provisional tax dates (no one likes paying tax in January)
  • Lower interest rates if you miss a payment
  • No penalties if you miss a payment
  • If you’ve got historical tax owing in some circumstances all penalties can be wiped
  • It’s safe – all funds are held in trust by the Public Trust
  • If you’re (one of the few) over payers of tax, we can earn you a higher interest rate, and get the overpayment back with one phone call – rather than waiting on the IRD to issue a refund
How to get started

If you’re interested in finding out more about Tax Traders, get in touch with us now on 04 212 4977 or hello@iif.co.nz.

With our bulk purchasing, we’ve been able to negotiate discounted interest rates so contact us to find out more.