Date posted: 21/10/2020 5 min read

Provisional tax and the road to recovery

Tax Traders’ Nicola Taylor says data on taxpayer behaviour indicates confidence in a recovery. Brought to you by Tax Traders.

The team at Tax Traders has analysed recent client data to gain insights on how taxpayers are dealing with their tax payments, the level of business confidence and availability of working capital in New Zealand businesses.

This data is drawn from the NZ$1.2 billion of tax credits under management with Tax Traders, and from over 700 accountancy practices and 120 leading corporates that they work with across the country.

The first graph shows a rolling 90-day average of the amount of tax being financed, where the baseline represents the same period last year. The graph shows by the end of March there was a dramatic and rapid increase in usage.

Tax payments were being deferredFigure 1. Tax payments were being deferred. Tax finance vs the same period last year (click image to enlarge)

“This covers two relevant situations,” explains Nicola Taylor, co-founder and director of Tax Traders. “Firstly, where a company is wanting to preserve cash or lines of credit in the business and so has sought funding from us to cover an upcoming tax payment such as 28 March or 7 May. And secondly, where a company has previously paid their tax to us but then withdrawn it for a period of time because they required working capital back in the company.”

Regarding situation two, Taylor points out that Tax Traders saw more tax withdrawals over the first two weeks of April than in the previous two years combined. This highlights the significant uncertainty felt by companies in March 2020.

But what Taylor finds most interesting is the fast return to normal tax-paying behaviour.

“Given how significant this was, you would think that it would take some time for companies to return to normal tax-paying behaviour. Certainly that expectation sat behind some of the legislative changes that we saw from Inland Revenue.

“But the data shows how quickly usage returns to normal levels of activity – for example, looking at what was happening in July, the need for working capital already seems to be reducing. This speed of reversion to the mean was surprising to us”, says Taylor.

Tax pooling usage quickly returned to normal

The second graph shows taxpayers using Tax Traders retrospectively to purchase tax they hadn’t paid in a prior period. The graph again shows a rolling 90-day average of the amount of tax being purchased, where the baseline represents the same period last year. The data shows a distinct drop in activity through the lockdown period compared with the same period last year. 

2020 tax demand rebounded quicklyFigure 2. 2020 tax demand rebounded quickly. Tax purchases vs the same period last year (Click image to enlarge)

Taylor notes that, “This is the mirror image of the previous graph and likewise reflects businesses holding on to working capital, given what was, at the time, a substantial level of uncertainty”.

The comparison to prior periods is stark. “This is the first time we have seen a drop on the prior period ever in our history,” says Taylor.

But again, as soon as the first lockdown period was over, the data shows purchasing behaviour rebounding quickly and strongly. It’s another sign of things returning to a normal pattern of tax pooling usage, albeit much sooner than was expected by the Tax Traders team.

Tax payers are showing confidence

This reversion to the mean reflected in both graphs paints a picture of recovery that is encouraging for New Zealand business. It also provides confidence that taxpayer behaviour appears to recover quickly from a period of uncertainty.

“This reversion to the mean reflected in both graphs paints a picture of recovery that is encouraging for New Zealand business.”

Taylor notes that despite the knowledge that the wage subsidy would eventually stop and that further periods of lockdown were possible, many of New Zealand’s corporate taxpayers showed confidence through their tax-paying behaviour in July.

Corporate taxpayers appear to be significantly less worried about retaining cash in their business than they were in March and this is an encouraging sign for the NZ economy.

Inland Revenue’s COVID-19 remission measures are still available, but they rely on the ‘significantly adversely affected’ test being met. The data suggests that the number of people significantly adversely affected is decreasing and is confined to particular industry groups.

Inland Revenue is aware that economic data is painting a more favourable picture and they will be expecting to see that reflected in tax payments.

Taylor is encouraging all accountants to remember how tax pooling can assist their clients with their provisional tax obligations, ensuring they get the best out of the legislative environment through easier refunds and easier access to losses.

Merade, Nicola and Josh from the Tax Traders team.Picture: Merade, Nicola and Josh from the Tax Traders team.

What is tax pooling?

Inland Revenue’s tax pooling framework gives taxpayers control over when and how they pay provisional tax – and saves them money.

Instead of paying directly to Inland Revenue, the taxpayer pays into the Tax Traders tax pool as cash becomes available through the year.

If they have underpaid at the end of the tax year they can buy tax to settle their liabilities, avoiding Inland Revenue late payment penalties and use-of-money interest. If they have overpaid, they can earn premium interest by selling their excess.

Tax Traders is an Inland Revenue-approved intermediary and all funds are securely held by the Public Trust.

Find out more:

Tax Traders is here to help you and your clients.

Call 0800 TAX TRADERS (829 872)

or email [email protected]