Tax pooling for farmers

Farmers need not take out an expensive bank overdraft when faced with a provisional tax payment says a tax adviser.

Tax Management NZ chief executive Chris Cunniffe said his company had pioneered the tax pooling system in partnership with Inland Revenue as a way of ‘‘removing the friction’’ from the tax system.

‘‘We never reduce the amount of tax people have to pay but we help manage the timing of when people pay their provisional tax,’’ Cunniffe said.

The pooling system has been in existence since 2003 and is sanctioned by Inland Revenue, which receives tax on a business’s behalf, and then the business can pay at a time that suits them.

A number of companies are registered with IRD to operate the scheme; Tax Management NZ says it was the original and still the largest.

Cunniffe said the system charged a much more favourable interest rate of 4.68 per cent compared to the IRD’s penalty interest of 8.3 per cent.

‘‘Put yourself in the shoes of a farmer who has a $40,000 provisional tax bill - does he want to part with $40,000 right now, because seasonality or business conditions being what they are he’d rather not pay the money.’’

The pooling system would appeal especially to horticulturists or sheep and beef farmers who did not receive regular payments, and knew their cash balance would return to normal in six months’ time, when business picked up again.

Dairy was a little bit different because the co-operatives make regular payments throughout the year. Tax pooling has other advantages: because it is not debt, it does not affect other credit lines; there is no credit check and the companies involved do not take security; if farmers do not need all the tax they have financed, they do not have to pay for it. How does it work? A farmer pays a tax pooling intermediary a one-off, taxdeductible interest cost, which is based on the amount financed and period of maturity, and the intermediary pays provisional tax on his behalf. This provisional tax payment is placed at the IRD in an account that is administered by an independent trustee.

That independent trustee will instruct the IRD to transfer the tax into the farmer’s IRD account when he pays the principal balance at the agreed upon time in the future.

Federated Farmers manager of general policy Nick Clark said farm incomes could be volatile and there were three provisional tax payment deadlines a year.

‘‘Tax pooling is a way to make sure you can make those payments even if you haven’t got the cash on hand right away.