IMPORTANT: Tax reminder letter will be sent by email

Tax payment letters (such as provisional tax and terminal tax) will still be sent to you a few weeks before the due payment date/s.

However, these are now processed differently and will be emailed to you unless you request otherwise. If you do not wish to receive these by email please advise us.

To ensure you are able to receive these messages be sure to add taxinfo@jacal.co.nz and
taxadmin@jacal.co.nz to your email whitelist or safe senders list (ask your IT guru if you are not sure how to do this).

Use-of-money interest rate change

Effective 8 May 2016, the use-of-money interest (UOMI) rates on underpayments and overpayments of tax changed.

  • Underpayments are now 8.27% down from 9.21%
  • Overpayments are now 1.62% down from 2.63%

Rates are reviewed regularly to make sure they are aligned with market interest.

Mileage rate changes

Inland Revenue announced in May that the Commissioner had reduced the mileage rate from 74c to 72c/km for the 2016 tax year (1 April 2015 to 31 March 2016 for standard balance dates). If you rely on the standard mileage rate when reimbursing your team for travel, make sure your payroll system is updated to reflect the reduced rate.

Focusing on profit

You already know about Net Profit and what it tells you about profitability.
Net Profit = Total Revenue – Total Expenses

This isn’t the end of the story. As you know profit can be elusive. It’s important to know as much as you can about how to look at the numbers to assess true profitability. Net profit margin is something else to look for.


Net profit margin

When you know your net profit, you can analyse net profit margin. It looks at net profit as a percentage of total revenue. In other words, it’s what proportion of revenue remains out of all revenue, after deducting operating expenses, interest, and taxes.

Net Profit Margin = Net Profit / Total Revenue
Why is net profit margin important?

Net profit is your bottom line after all and some business owners might be content not to dig deeper. But if you don’t, you won’t know what percentage of revenue ended up in the bottom line. Shareholders and potential investors would be quite interested to know what it is because net profit margin says how effective your business is at taking revenue and making it into profits available to shareholders. If you’re trying to pitch your business to investors, net profit margin is a way to grab their attention.

Keeping an eye on changes in your net profit margin is also a great way to keep tabs on how profitable your business is over time.


How is net profit margin different from gross profit margin?

Let’s go back to basics. Profit margin is a percentage that tells you the amount a company earns per dollar of sales.

Gross profit margin shows your total revenue minus what it cost the business to produce the goods or services it sold. It’s the amount a company earns per dollar of sales after you deduct how much it cost to make the sale (aka cost of goods sold). It’s a broad brush indicator of profitability and you can use it to help you work out your breakeven point.

Because you can be making more money but not as much profit (if, for instance, your overheads or your taxes go up), net profit margin gives you the next level of detail to help you zero in on profitability. It factors in other expenses beyond the cost of sale.


Summing up

Net profit margin shows your profit as a percentage of revenue, after all expenses have been deducted, including tax and any interest paid on money you owe. It is the percentage of revenue that actually reflects a company’s profit per dollar of sales. If you operate in a competitive market, bringing your costs down might be a better strategy than increasing your prices, especially if in the short term it’s hard to increase your market share. A better cost management strategy, consolidating your debts or finding a more favourable interest rate may all be worth considering.

Your bottom line remains all important. But squeeze it to make it tell you more so you can keep improving profitability in your business.

Underpaid income tax?

Underpaid provisional tax can cause a few headaches.

Maybe you did not keep up with your provisional tax payments throughout the year? (oops) Perhaps you did not end up paying enough because you had a better-than-expected financial year (yay! but damn, an increased tax liability). It could be that seasonality or volatility make it difficult to forecast your provisional tax payments.

Whatever the case, owing the taxman additional income tax can put pressure on your business cashflow. With Inland Revenue’s interest clock continuously ticking at 8.27 per cent (and at 9.21% for tax debt incurred up until 8 May 2016) while that tax remains unpaid, the cost can quickly add up.


Tax pooling

An option we have discussed before is tax pooling. It is a service designed to reduce interest costs and provide payment options for provisional taxpayers.


How does it work?

For underpaid income tax, you can settle what you owe IRD by paying through a tax pooling intermediary such as Tax Management NZ (TMNZ) at an interest cost lower than the interest IRD charges on underpaid tax.

The payment you make is essentially a purchase of tax that TMNZ paid to IRD on the original date the provisional tax was due.

As this payment is date-stamped, IRD treats the tax as paid on time once it has processed the transfer from the tax pool to your IRD account. Any late payment penalties and interest showing on your account will be reversed once this happens.


When might this be useful?

Tax Pooling can be used if you have underpaid income tax for 2016 income tax year.


Is tax pooling secure?

Tax pooling intermediaries are registered with IRD and operate under legislation set out in Income Tax Act 2007 and Tax Administration Act 1994.

The system was proposed by IRD so private markets could provide ways for provisional taxpayers to manage their income tax obligations and reduce their compliance costs.

The tax pool accounts operated by tax pooling intermediaries are held at IRD and managed by an independent trustee. The independent trustee also oversees the bank accounts in which your payments are made.


Timeframes for using tax pooling

Tax pooling gives you an extra 75 days past your terminal tax date to pay what you owe IRD. For underpaid income tax relating to the 2016 tax year, you have until mid-June 2017.


What to do next

Contact us if you would like to discuss tax pooling as an option to clear up your underpaid provisional tax debt.

Residential land withholding tax (RLWT)

The Taxation (Residential Land Withholding Tax) Act 2016 received Royal Assent on Friday 13 May 2016.

From 1 July 2016 this introduces a requirement to have residential land withholding tax (RLWT) withheld from a sale/disposal of residential land where:
  • the property being sold/disposed of is located in New Zealand and meets the definition of “residential land”; and
  • the vendor acquired the property on or after 1 October 2015 and owned it for less than two years before selling (i.e. it‟s taxable under the bright-line test, ignoring the “main home exclusion” and all other land sale tests); and
  • the vendor is an offshore RLWT person. (Note: this is a newly defined definition and differs from the definition of offshore persons for IRD number applications)
The sale/disposal will be excluded from having RLWT deducted when:
  • the property is being transferred upon the death of a person to the executor or administrator of the estate, or
  • it’s an inherited property transferred to, or sold/disposed of, by a beneficiary.


If you hold a valid certificate of exemption (COE) from RLWT then no RLWT will be deducted. A COE from RLWT can be applied for if the sale involves the disposal of your main home, or by those in the business of developing land or dividing land into lots or erecting buildings.

 RLWT tax credit

If your income tax return includes a taxable property sale that has had RLWT deducted you are entitled to claim a tax credit for this amount.

Important Dates to note

July 7th 2016
  • Last day to file 2016 income tax return (if you don’t have a tax agent with Extension of Time)
July 28th 2016
  • GST for June 2016
August 28th 2016
  • 1st instalment 2017 Provisional Tax (March balance date)
  • GST for July 2016
September 28th 2016
  • GST for August 2016

In order to succeed, we must first believe that we can.

Nikos Kazantzakis

Disclaimer – While all care has been taken, Johnston Associates Chartered Accountants Ltd and its staff accept no liability for the content of this newsletter; always see your professional advisor before taking any action that you are unsure about.