Tax solutions for the holiday cash squeeze

Owners of small businesses know that the holiday season brings some cash challenges.  Not only does productivity wane as the sun warms, but we have a heap of holidays and then a steady and unrelenting demand for tax payments. 

Typically these taxes will include regular PAYE but also:-

• 15 January - GST and provisional income tax due

• 28 February - GST due 

• March - feels like you can draw breath, but then…

• 7 April - Terminal income tax for the prior year

• 7 May - GST and 3rd provisional tax instalment

It's a tough time for the wallet and can leave us feeling stressed and helpless. 

There are many ways to improve cashflow in a business (including planning, savings/tax account, rainy day fund, debt factoring, overdraft etc) but, if you haven't already adopted these, then here are some quick fire ways to survive the next 4 months or so.

Invoice promptly

If you've done the work and delivered the goods then put aside any fears of being perceived a Scrooge and accept that businesses need to invoice in order to survive.  Regardless of the date, if you've reached the point that you are entitled to raise an invoice, then do so.

Recovery and discounts

Before everyone else gets paid make sure that you are going to be satisfied too.  This may include you sending reminders when the due date arrives without payment being received.  Or, you may be more inclined to offer a discount for early payment.

However, in my experience people either try to pay by the due date or they simply don't.  A small discount rarely sways them.

Make payment easy

Have you thought about offering payment by debit or credit card?  We are currently trialling Stripe in Xero to enable people to pay by credit card.  Should they choose to take advantage of this then surcharges may be passed on to the customer. 

Delay supplier payments

Whilst many businesses may opt for this strategy, it's not one that I'd advocate.  It's fair and reasonable to utilise the fullness of the credit terms offered but, beyond that date, such a strategy will risk your relationship and is contrary to your own desires to be paid promptly, see above.

Tax finance

Tax pooling providers, such as TMNZ (Flexitax), also offer financing so that payment can be made on time and simply paid off, albeit with interest, over a period. 

Tax pooling

Instead of setting up finance to pay the income tax on time, you may opt to settle in arrears once the liability has been calculated in your tax return.  This will also help mitigate penalties but, as always, there is an interest cost.

Delay payments to IRD

I would urge caution here. 

Whilst IRD has been viewed by some as lender of last resort in recent years, it is clear that this won't stand and even small balances are being sent to the IR recovery teams.  My advice would be to ensure that your GST and PAYE bills are met on time or, prior to due date, you have established an instalment arrangement through MyIR.  Remember that PAYE and GST is not your money, you are merely the custodian of this.

Provisional tax offers a little more flexibility and a nuanced approach.  Provisional tax for the current year is most often based on the simple assumption that your tax bill this year will be 5% more than last year.  Where you believe your circumstances have changed and the tax bill may ultimately be lower, then you may pay less than what has been calculated. 

The penalties regime has been diluted in recent years so as not to be so punitive for underpayments. 

If you qualify as a safe-harbour taxpayer (residual income tax less than $60k) then any short-paid provisional tax will not have interest imposed until after the terminal tax due date - typically 7 April of the following year for those with a tax agent. 

As for late payment penalties, the short-paid amount will only incur a 5% penalty - 1% the day after due date then 4% seven days after.

The imposition of interest and penalties on underpaid provisional tax can vary depending on quantum of tax and method of calculation.  If you are intending on short-paying your provisional tax then it would be best to check with me first so that you understand the consequences.