Last week, just prior to parliament being dissolved, the COVID-19 Response (Further Management Measures) Legislation Act (No 2) became law.

For some time we have been in discussions with IRD and Government regarding the first 2021 provisional tax payment for most businesses (March balance date) which is due on 28 August. Historically most taxpayers have used an "uplift" method to calculate their provisional tax, which assumes that income will be 5% higher than last year or 10% higher than the year before. Obviously with the Lockdown in April this method will no longer be appropriate for many businesses in the 2021 year.

However, the other option available to most businesses is to "estimate" their income. Given the significant uncertainty as to how the rest of the year might play out making such an estimate and getting it right is significantly harder than in a normal environment. However, the disincentive to estimating income is incurring IRD use of money interest at 7% for any tax short paid.

The legislation passed last week provides remission of this interest in the 2021 year for provisional taxpayers affected by COVID-19 where the taxpayer making an estimate, has a residual income tax liability (RIT) of less than $1 million and the taxpayer's ability to make a reasonably accurate forecast was significantly, adversely affected by COVID-19 and as a result the taxpayer failed to pay the right amount of tax on that instalment date. Where these criteria are met the taxpayer should pay the terminal tax for the 2021 year and ask the IRD, as soon as practicable, to remit the interest.

This amendment provides small businesses with the ability to estimate their income in an uncertain world without the risk of being charged interest at 7% (significantly higher than most cost of borrowings in the current environment).

If you want to discuss your provisional tax options for 28 August or need assistance in projecting cash flow or budgeting please contact your Polson Higgs Advisor.