IRD criticised over gap in the tax tightrope

The margin between what interest rates the Inland Revenue Department will pay on under and overpayments of tax is set to increase sharply on Sunday at a time when banks are under pressure to reduce their margins.

Polson Higgs tax partner Michael Turner told the Otago Daily Times the drop in the IRD interest rate by 0.82% to 8.91%, from 9.73%, for underpayments would be welcomed by the business community.

However, the corresponding 2.41% fall - from 4.23% to 1.82% - in the rate the IRD paid for overpayments seemed disproportionate.

There was now a 5.5% gap between the rate taxpayers paid interest to the IRD and the rate they received interest from the IRD, but that gap from Sunday would be 7.09%.

"The rate setting and the gap between the paying and receiving rates has frustrated taxpayers for some time. I think it might also be a bit rich for the Government to beat up banks about their margins when the IRD is maintaining a very healthy 7.09% margin in what are difficult times."

The IRD interest rate for underpayments of tax has been falling this year. On March 1, the rate dropped from 14.24% to 9.73%. The underpayment rate dropped from 6.66% on March 1 to 4.23%.

The issue was important because many small and medium enterprises (SMEs) were facing cash-flow problems during the recession and they were therefore focused on the cost of borrowings, he said.

Businesses were doing everything possible to avoid attracting IRD penalties, where the rates were perceived to be high.

"When cash flow is tight, businesses try and pay the right amount of tax as much as possible. If the IRD interest is high, businesses don't want to pay the penalties. But with the overpayment rate where it is, they also don't want to overpay. Businesses are walking a tightrope."

One of the problems was the "very blunt" wording of the Tax Act, Mr Turner said.

Interest was calculated (for companies, trusts and some individuals) by taking the businesses profit, working out the tax on that profit, dividing it by three and that was generally the tax that should be paid at each provisional tax date during the year.