Understanding the Use of Money Interest (UOMI) System

Some taxpayers are subject to use of money interest when they don’t pay their tax, pay late or underpay.

When do you have to pay use of money interest to Inland Revenue?

Taxpayers that must pay use of money interest are those who:

• have under-estimated their provisional tax
• have earned income which has either not been taxed, or has not had enough tax deducted from it, and the end of year residual tax works out at $60,000 or more
• pay their taxes late.

COVID-19

Inland Revenue has discretion to write-off penalties and interest for businesses unable to pay taxes on time due to the impact of COVID-19. You should still file returns, and when you are in a position to do so, you should indicate when tax can be paid, or request instalment arrangements. You may be eligible for a UOMI write off. Contact us to see how this affects your business.

How is the actual amount of use of money interest calculated?

Use of money interest rates are set by Inland Revenue Department. They are set at a level intended to discourage taxpayers from using Inland Revenue like a bank. 

From 9 May 2023 the rate at which you pay use of money interest is 10.39%. The rate at which you receive it (if you overpay your tax and you are in one of the above categories) is 3.53%.

If you happen to be late in paying your taxes, you will be subject to a charge for use of money interest until your account is fully settled. Even if you enter into an arrangement to pay off your taxes over time, it is important to note that you will still be required to pay the interest. However, in these cases, you can often avoid any further penalties.

It's important to note that the calculation formula does not factor in any seasonal fluctuations that may occur in your business income cycle. This means that even if you generate the majority of your income in the later part of the year, the calculations will not account for this. Inland Revenue assumes that your income is spread evenly throughout the year.

Provisional taxpayers using the standard uplift method

For all taxpayers who use the standard method to calculate and pay provisional tax, use of money interest is not payable on the first two provisional tax instalments but will only apply from the third instalment.

For taxpayers who use the standard uplift method and have an Income Tax Liability (Residual Income Tax) of less than $60,000, use of money interest will not be payable on any resulting shortfalls at each instalment date. Note however, use of money interest will still be payable where the Income Tax Liability (Residual Income Tax) has not been paid by the terminal tax date (7th April of the year following balance date for a 31 March balance date taxpayer).

The GST ratio option

If you choose to use the GST ratio option, you are not charged use of money interest. The GST ratio option allows you to base your provisional tax payments on a percentage of your GST taxable supplies. It applies to provisional taxpayers that are also GST registered and who:

• have been GST registered for more than two years
• have a residual tax liability of less than $150,000
• are on a one-monthly or two-monthly GST registration
• apply to Inland Revenue before the beginning of the income tax year

Partners in a partnership are not able to use this option as they are not GST registered (it is the partnership that is GST registered and the individuals that are the provisional taxpayers).

Inland Revenue determine an appropriate percentage which you use to pay your provisional tax. Every two months you include a payment of provisional tax in your GST return based on the amount of your income. You can make adjustments for any asset sales included in your income for a certain period.

This may suit your business better if you have fluctuating seasonal cash flow patterns. We can discuss this with you further if you are interested.

Accounting Income Method (AIM)

With the Accounting Income Method, as long as you make your payments in full and on time, you will not be liable for use of money interest. Small businesses with a turnover of less than $5 million a year and the approved accounting software can work out their provisional tax using AIM. You pay provisional tax at the same time GST returns are filed.

You only pay provisional tax when your business makes a profit. If your business makes a loss you can get your refund straightaway rather than waiting until the end of the year.

Minimising use of money interest

Regular tax planning is essential for the financial success of your business. It is crucial to anticipate and prepare for your tax commitments in advance. By doing so, you can avoid penalties and interest charges imposed by Inland Revenue.

If you anticipate that you may fall into the interest regime, it is highly advisable to make voluntary payments of provisional tax as you go. This proactive approach can help you manage your cash flow more effectively and prevent any unnecessary financial strain. By making regular payments towards your tax obligations, you can avoid accumulating a large sum that may be difficult to pay off in one go. Instead, you can spread out the payments over time, making it more manageable for your business.

In addition to proactive tax planning, it is crucial to have a reliable system in place to track and monitor your income throughout the year. Investing in a good computer package that generates regular management reports can provide you with valuable insights into your business's financial performance. By having a clear understanding of your income as it unfolds, you can make informed decisions and adjust your tax planning strategies accordingly.

You have the option to take responsibility for completing these management reports yourself or delegate the task to a trusted professional, like us. Our experienced team has extensive knowledge in tax planning and can ensure that your reports are accurate and up-to-date. Many of our clients rely on our expertise to handle their financial management, allowing them to focus on other aspects of their business.

Our team is here to support you every step of the way, providing expert advice and assistance to ensure your tax obligations are met efficiently and successfully.

Keep in mind

Make sure you have a broad idea of your likely tax commitments in advance. We can prepare a tax plan for you.

If your income circumstances change, let us know as there may be provisional tax (and interest) consequences.