Last time on our blog we discussed Terminal and Provisional tax. The fun is not yet over… this week we thought we might tackle Use of Money Interest, or for short, UOMI.
So what is UOMI?
Use of money interest is the IRD charging you interest on the tax you have underpaid, effectively trying to discourage you from using them as a bank.
In their eyes, you have had the use of the money when you shouldn’t have had it, and as such it stands as an outstanding payment with them.
When does it get charged?
This question is a little bit trickier.
Let’s look at our fictitious company, The Mad Scientist again.
Remember how, for example one, in their second year they still had terminal tax to pay? They’d paid provisional tax of $29,400, but their total (residual) tax to pay for the year was $42,000. This meant that they still had $12,600 in terminal tax to pay.
Well, in the IRD’s eyes, this means that they’ve had use of that money, when they shouldn’t have had.
They believe that the company should have kept an eye on their profit, and adjusted the provisional tax they were paying as the year went by.
For companies, if their residual tax for the year is $2,500 or more, and they have terminal tax to pay, then they will get charged UOMI on that amount.
For individuals, the IRD is not quite so strict. If your residual tax to pay is under $50,000, and you were not aware you should be paying provisional, or you have paid the provisional tax that was calculated automatically from your previous year’s tax return, then you won’t be charged.
However, if your residual tax is over $50,000, or you have estimated your own provisional tax and it was not enough to cover your residual tax, then you will also be charged UOMI.
How do they calculate UOMI?
Let’s again use The Mad Scientist as the example.
As already discussed, as they have terminal tax to pay of $12,600 within their company, they will have UOMI to pay on that amount.
The IRD calculates UOMI by saying that the total tax should have been paid throughout the year as provisional tax. This means that in their eyes, The Mad Scientist should have paid $14,000 at each provisional tax date.
However, they only paid $9,800 on each of these dates, so the IRD charges interest at 8.27% (changed on the 8th May 2016) on the leftover amounts, from the dates it should have been paid till when it is paid. Let’s assume this is the terminal tax due date of the 7th of April the next year.
|Provisional Tax Dates
||1/3 of Residual Tax
For smaller companies that may not be earning so much these charges may not amount to much. But if your company is starting to grow their profit, UOMI can be an unwanted sting.
So how can you avoid UOMI?
The best way to do this is to keep an eye on your profit as the year goes on.
Also, UOMI works both ways. So if you happen overpay and end up with a refund at the end of the year, you will get interest back on it as well since the IRD has had use of your money. Of course, the interest rate is much lower when the IRD owes us – 1.62% in comparison to 8.27% – but at least it’s something.
But if you don’t want to make wild stabs in the air as to how much provisional tax you are paying, talk to your accountant.
Not only can they help advise you on this as the year goes by, you will also have a better idea on how your business is going, and be building a stronger relationship with your accountant. According to Xero’s research, this is a very good thing. Their research suggests that having a strong relationship with your financial adviser is good for your business. We agree.
Here at MHCo, we strive to create, and maintain, strong relationships with all our clients. After all, their success is our success.
So stop worrying about tax, and UOMI, and come talk to us. We’ll do our best to make tax easier to understand, and take the weight of not knowing off of your shoulders.
Thanks, the MHCO team.