How tax pooling works for everyone
Chris Cunniffe explains tax pooling at a barbecue to a plumber and his fishing partner who is the CFO of a big chain of clothing stores.
Tax Management NZ CEO Chris Cunniffe inevitably gets asked what he does at the neighbourhood barbecue. Most of us have jobs that are easy enough to explain. Chris’ story is different and not immediately obvious, but he has a knack of explaining something that is unique to New Zealand, involves pools of money worth billions of dollars and saves the IRD and businesses lots of grief and money respectively. Bernard Hickey introduces a Newsroom content series on tax pooling.
Chris first asks for another beer. And then he starts by explaining why Brian, the plumber, and Shane, the CFO, might look at using tax pooling.
Chris: Most people realise they need to pay their tax and it’s the right thing to do, and they just want to get on with life.
The problem is that IRD is quite prescriptive about when you pay provisional tax and that doesn’t suit all people all the time.
You could decide to not pay the tax and run the risk of finding out how the IRD deals with you. You could go into overdraft. You could just go without. You might not buy the new gear you need or hire that assistant.
But what if I could change that for you? What if I could let you pay your tax when it suited you?
We start with the concept: you know you want to pay your tax – let me show you how to do when it suits you. We call it tax on your terms.
Dave the plumber then asks how that works.
Chris: We will pay tax to IRD on your behalf and you pay us back when it suits you.
Or you pay through us in small instalments -- what you can when you can. We’ll do that and get the IRD off your back, with no interest or penalties, and our funding rate is a damn site cheaper than the banks.
Dave: How does that work? How can you afford to do that?
Chris: The IRD sets provisional payment dates of August 28, January 15, and May 7 for small businesses like yourself with an end of March balance date.
You may not have the cash to pay on January 15 when business is a bit quiet. Normally, you’d have to borrow the money from a bank or use a credit card with a double digit rate. What I do is build a book of hundreds of small businesses tax situations, many of whom have the same problem. On the other side I have funders who put money into a trust so we can pay the IRD all those accumulated tax bills on January 15.
You pay us back when you can with a much lower interest rate on that money than the bank, and IRD doesn’t have to charge anyone penalty interest.
Then Shane jumped in to ask where Tax Management NZ got its money.
Chris: We have a large borrowing programme with a number of funders. We’re able to pass on the benefits of scale to all taxpayers who use us.
It also caters for some of our bigger clients who have really chunky tax bills to pay on November 28, March 28 and July 28, which are the provisional tax dates for June 30 balance date companies.
I had one client recently who realised that March date was going to coincide with a dividend and a seasonal cash outflow. So it was a bit of a cash crunch. They needed $1 million . They could in theory have gone to their bank for an overdraft and had to spend a lot of time rewriting their existing agreements around security.
These companies come to us and the advantage of them using us is we don’t take security. It’s low doc and low touch and it doesn’t interfere with their banking requirements.
That $1 million for a month might cost you $3,300, but it’s cheaper than opening up a new line of credit at the bank and rewriting security agreements.
At the very big end of town we may not be cheaper, but sometimes they will use us because it’s more flexible.
Dave then asked how this tax pooling all got started, because he hadn’t heard of it overseas.
Chris: It all goes back to the reforms of the late 1980s when the IRD and everyone else wanted to create a level playing field for taxpayers. That created the provisional tax system as we knew it until last year where you essentially had to guess perfectly what your provisional tax would be, and if you got it wrong the IRD would charge everyone the same interest rate.
That meant everyone paid the full 2.5 percent margin over the mortgage rate at the time. That was often much higher than the rate big businesses could get from their banks. And it meant a lot of businesses had to pay penalty rates through no fault of their own.
Some of the big companies had huge swings in their businesses. I was the head of tax at Air NZ and all it took was a big currency shift, or a change in Japanese demand or a change in the fuel price and our forecasts were of course wrong by the end of the year.
The IRD realised all this uncertainty and penalties for businesses large and small was not a good idea. The Government said they needed to sort it out.
Tax Management’s founder Ian Kuperus had already pitched the idea. The planets aligned. IRD had a need. Ian had an idea that solved their need and hey presto.
Shane then asked Chris how he had got into the business.
Chris: I was a very early adopter at Air NZ. My provisional tax was all over the place. If Air NZ was going one way, the chances were that a bank or Fletchers or Telecom was going the other way. In that pool of all of corporate New Zealand there’ll be winners and losers and what IRD had noticed, that on balance the right amount of tax is paid. It’s just paid by the wrong people.
I’ve got too much. You’ve got too little. If you’ve got too little, then IRD is going to smack you with a usurious interest charge and pay me a derisory interest payment.
Wouldn’t it be nice if the two of us could get together and help each other out. That’s exactly what the tax pool does.
Dave then remembered something about a change in the provisional tax system last year to the more traditional system used overseas where penalties are only charged once it’s clear someone is deliberately under-paying. Doesn’t that make this tax pooling thing redudant?
Chris: We’re focused more now on helping people around their cashflow, rather than just dealing with this volatility issue.
It’s tax on your terms. You pay when it suits you because what IRD hasn’t changed is that bit about ‘I make the rules’ about what dates you pay on.
The pain points that people identify with is cashflow: having to pay when I don’t have the money and having to pay when it doesn’t suit me.
Dave then asked if it meant he didn’t have to deal with the IRD.
Chris: You’re not the only one. People have this fear of authority, and the IRD are trying to change it, but people would rather use an adviser.
We’ll take that pain away. We’ll deal with the IRD. The IRD know us. It’s the same as your tax agent. You pay them to do this stuff. Most clients will say: ‘don’t talk to me. Talk to my agent’.
Dave then had a thought: couldn’t he just use the equity in his house a bit like the tax pool, and only pay the variable mortgage rate?
That’s the whole stress of running a small business off the equity in your home, which is you’re betting your whole family home when you’re running your business.
Generally your advisor would tell you to get your home into a trust, cauterise everything, quarantine it and then go and run your business.
At that point Dave’s wife arrived and asked why they were talking about their mortgage, and Dave said he had an idea for disconnecting it from his plumbing business...and he also an idea for a family holiday in summer that didn’t involve worrying about the tax due on January 15....
Chris asked for another beer.
*How tax pooling works for everyone is the first article of a sponsored content series with TMNZ
TMNZ is New Zealand’s leading provisional tax payment intermediary. Their clients include thousands of small and medium-sized businesses as well as some of New Zealand’s largest banks, state-owned enterprises and well-known corporate names. TMNZ takes the pain out of provisional tax by providing the flexibility that lets businesses pay when it suits them (not when the taxman tells them to), without facing consequences from IRD and at a lower interest cost than borrowing from the bank.