Inland Revenue has advised of another change to the Use of Money Interest (UOMI) rates charged on underpayment and overpayment of New Zealand tax.
Despite the comments we hear from many the many business that get hit with UOMI (use of money interest), is not actually a penalty.
The government regards it as a recovery of the cost they incur by not collecting tax faster.
Unlike with PAYE deducted from wages and salaries, where the tax deducted is paid by the 20th of the following month, UOMI usually applies where there is catch up tax.
The most common example of this is after the end of the year when we have prepared your financial statements and calculated the terminal (or final) tax payment.
You will be aware that this is the difference between the tax calculated on your actual income and all those provisional tax payments you made during the year.
Even though those provisional tax payments may have been the right amount at the right time, the government still feels that it lost out by waiting for that final payment.
For that reason it charges interest, known as Use of Money Interest, on that outstanding balance.
And as you would expect with any tax system, they aim to collect more than they pay.
For that reason, there is a great disparity between the interest they charge on this shortfall of tax and the amount of interest they will pay when you have overpaid!
The actual rate of interest changes from time to time to reflect the market.
The latest change took place on 8 May 2016 where the rates charged by Inland Revenue on underpaid tax dropped slightly from 9.21% to 8.27%.
The interest rate paid to taxpayers on overpaid tax also reduced from 2.63% to 1.62%.
And yes, that amount is subject to tax!
Of course, our tax clients don’t have to pay UOMI on income tax or reassessed tax thanks to the many clients who deliberately overpay their tax because they can source funds cheaper than the government charges.
We us can IRD approved scheme that allows us to retrospectively tax swap removing UOMI altogether and reducing the interest cost by around 30%.
The information in this article is indicative of NZ tax rules and changes and not intended to be complete for all intents or purposes and does not constitute advice. It is recommended that you obtain professional advice, suited to your particular circumstances, from us before acting on anything you read.