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.
The problem was that some businesses were very seasonal and made all of their profit in the last two months of the year. They still had to estimate what their profit would be for the March year.
Businesses with a March year end paid their provisional tax on August 28, January 15 and May 7.
"May 7 is no problem because it is after balance date, but for August 2009, businesses will be asked to estimate and pay their tax on profits for the March 2010 year.
"Businesses tend to estimate on the high side as the interest rate on underpayments means it is unattractive to underpay," Mr Turner said.
Revenue Minister Peter Dunne said the use of money interest (UOMI) rates were a cornerstone of the tax compliance system in New Zealand.
The legislated twin objectives of the UOMI provisions were to fairly compensate the party (either the Crown or the taxpayer) that does not have the use of its money and encourage taxpayers to pay the right amount of tax on time.
"The underpayment rate attempts to reflect the fact that the Government is an involuntary and unsecured lender, and is unable to assess the actual credit worthiness of each taxpayer, unlike a bank.
"The overpayment rate is designed to discourage taxpayers from using Inland Revenue as an investment opportunity."
The critical factor in setting the UOMI rates was the desired rate that would encourage taxpayers to pay the right amount of tax at the right time, rather than the differential between the overpayment and underpayment rates, he said.
Those considerations differed from those that a bank would take into account in setting its rates.
The previous overpayment rate of 4.23% was one of the "best rates in town" and there was evidence that some taxpayers were deliberately overpaying their tax to take advantage of this high rate.
That type of behaviour was contrary to the policy intention of the UOMI rates and constituted a significant fiscal risk, Mr Dunne said.
