Josh co-founded Tax Traders with Nicola Taylor eight years ago aiming to bring the benefits of tax pooling to all taxpayers. It’s been hugely successful since then growing year on year at around 40%.  Currently Tax Traders is working with over 400 accountancy firms around the country including the preferred provider for Deloitte and the tax pooling business partner of Chartered Accountants Australia and New Zealand.


Morena Josh, welcome to the podcast, thanks for joining us.

Josh Taylor
Thanks, Terry. Great to be here.

Terry Baucher
Our lives have been dominated by Covid-19 over the past few months.  When did you realise that this was going to be much bigger than anyone was thinking at the time?

Josh Taylor
It’s a good question. I don’t know if it’s bigger than anyone was expecting. I think it got really big, really fast about the middle of March. That’s when it really started to bite for us after the OCR drop on 16th March to 0.25%

The financial markets reacted almost instantly. And that’s when it gets interesting for us as we sit between a lot of fund managers. They are a source of funding for people who can’t pay their tax on time or who are looking for additional time to pay. And what we saw as the money supply and that side of the market really started to shrink, people got very nervous. “What don’t we know? What does the government know that we don’t know?” Because an OCR drop of that magnitude, we haven’t seen that before. Where are things going?

So that’s when it probably started for us. And the intensity stayed pretty high for two to three months. I think we’re starting to see that ease off now.

I mean, so you’re working fairly long hours then.

Josh Taylor
Yep. Through the lockdown from 16th March it was regular 80-90 hours a week. What it did was it threw up a whole lot more work for us. And it’s interesting looking through the emails the other day and a couple days after the OCR announcement, we had Inland Revenue call the various tax pooling companies and say, “Look, we want to get you on a phone call as an industry just to talk about what what’s happening, where we see things going. We’re mindful that some people may struggle to make payments that are due on 31st March.  We want to be mindful of that and see what we can do to help.”

This was four days later over a weekend, by which time we’d already drafted two submissions to Inland Revenue about how they could respond and what options they might be able to take through this Covid period. So, we were already churning out material for them before there was any legislation on the table or any announcement.

We were contacting politicians, multiple points within Inland Revenue and engaging with other government departments like MBIE.  So, there’s been a huge additional workload and a lot of that’s been driven around wanting to get greater certainty for our clients on the options they have.

We’ve had a situation where the money markets didn’t quite stop functioning, but it really did slow down. People are thinking “How do we manage our way through this?  On paper we know that we’ve still got good businesses, but we need to keep the cash going so that we can get through this year and out the other side.”

And so at least from a tax perspective, which is where we operate, we’ve been doing what we can. There’s been a very high workload to get that which we’ve managed now but it has been a bit of a trying time.

Bit of an understatement there. I’m interested in what you’re saying about Inland Revenue and that during this time you have worked very closely alongside them to an extent you wouldn’t normally do.  It’s also interesting to hear that they were on the phone to you as an industry saying, “Hey, we can see something’s happening here how are we going to react to that?” How was it working with Inland Revenue? Because I imagine there were frequent contacts at various levels throughout the period.

Josh Taylor
You know, look, it’s been interesting with a couple of caveats. An organisation the size of Inland Revenue certainly isn’t going to speak with one voice and you’re going to have different pockets within it. So dealing with it did pose some challenges.

The front-line people we’ve been engaging with from the tax pooling side, were very responsive, very helpful, very open to ideas. We had people from Inland Revenue contacting us saying “We’d like to hear your thoughts on what we can do. We’d like to get all the ideas into the mix so we can consider what can happen.”

So, I think a lot of what we saw with the front-line staff was the best of Inland Revenue.  In talking with accountants as we do every day, their feedback was the same.  Inland Revenue got a lot of respect in terms of their willingness to remit use of money interest and provide quite favourable terms to taxpayers.

At the same time we saw some kind of challenging behaviours where very early on, Inland Revenue signaled to us there would be the ability for the deadlines to pay 2019 tax to be extended. They were aware that people had terminal tax to pay for 2019, but the legislation that was on the table wasn’t going to be sufficient to enable taxpayers who had missed provisional payments for the 2019 year to tidy that up and get a reduction in the use of money interest costs. The use of money remission legislation only applied to payments made after the 14th of February this year, so it wasn’t going to help provisional payments for the 2019 year that were otherwise not paid.

So Inland Revenue said, “Look, we think the best way for us to resolve that is by expanding the remit of the tax pools for this period”. And we had that signal to us that’s where they were heading towards the end of March, early April. But they caveated it by saying, look, we need enabling legislation to make it happen.

Now, the legislation to make that happen was passed at the end of April, but it then needed an Order in Council. It took them until the end of the start of the second week of June to get that Order in Council in place. And without that Order in Council, we were within a week of running out of time for the 2019 year.

So, although the change was signalled pretty early,  to actually get it wrapped up and tidied up, took them right to the eleventh hour, which probably created a bit more stress and pressure than was needed. I mean, we got there in the end. So that’s a big tick. But could we have got there a bit easier? I would like to think so and I think there are people within Inland Revenue who would like to think the same as well. Some things just take a bit longer. But there are probably some lessons learned there.

Absolutely. Now there was a story that the tax pooling team within Inland Revenue is relatively small. What size is it now? It must have been extended to cope with the strain. It could not be doing what they did with the resources they had if the story I heard that were only two or three in that team was correct.

Josh Taylor
Yeah, so there’s a couple of teams that manage tax pooling. There’s a core team of two or three people in Upper Hutt which does the processing. And historically, it’s been that size but it’s important, I guess, to highlight the improvements from the START system that we’ve seen rolled out aggressively over the last couple of years. It’s automated a number of processes that under the old computer system were a manual process.

So in past times we’ve seen transfer backlogs because of the sheer volume of work and it’s taken maybe three to five weeks to process transactions.Now those are happening overnight, in fact, instantaneously, really as soon as we schedule a transfer, no matter how many thousands of transfers, it all happens instantly.

So Inland Revenue has really scaled up its capacity. And so, for that for that 95, 98 percent of transactions that are straight down the middle, they go through very quickly now. So, it is efficient from Inland Revenue’s perspective.

There’s a support team at Manukau which handles the exception queries. I don’t know how many people are in that team, maybe two or three people seem to be in there. Things can get a bit bogged down there depending on the complexity of the transaction. So, you could see another week or two to work things through. But Inland Revenue have been investing in their capacity in this space, which is a good news story.

That’s great to hear. Now, you touched on 2019 and the data suggests there’s still a lot of people who have outstanding obligations for the 2019 tax year. So how is Inland Revenue providing assistance for those people to pay through tax pooling? What’s the story there after these eleventh-hour changes finally came through?

Josh Taylor
There’s actually some commentary on Inland Revenue’s website released on 14th April with about eight different case studies around the 2019 year.

But as I mentioned before, because of the way the legislation’s been drafted it applies for payments that are due after 14th February 2020. Now, Inland Revenue has the discretion to remit use of money interest. What that means is that if you’ve got a payment that was actually due on the 7th April, Inland Revenue can remit that use of money interest if they think you meet the criteria. So that’s classically that’s the case for a taxpayer whose provisional tax is under $60,000 and has paid their uplift on time.

Inland Revenue have been very clear though, that this exemption won’t cover a taxpayer who hasn’t paid their provisional tax uplift on time so is incurring use of money interest from the first provisional tax payment date   which was before 14th February.  It also can’t help the situation where you’re a taxpayer whose residual income tax is over $60,000 and all tax is due by that third provisional tax date.  This is either 7th May 2019 (31st March balance dates) or 28th July 2019 (30th June balance dates) and again, because those two dates are before 14th February 2020, such taxpayers are not eligible for the use of money remission.

And again, the challenge here is that for all of those taxpayers, 2019 was a profitable year unaffected by Covid. But now they’re trying to pay it in a period that’s affected by Covid. And IRD, acknowledge that they are aware of the realities of business. You know, you’re paying for last year’s tax with this year’s income which is getting squeezed.

Inland Revenue needed to do something. And so, they’ve looked at it and decided the easiest way to manage is to expand the scope of our tax pooling rules and provide a different window of time for 2019 payments.  So, you’ve now got until 21st July to apply to a tax pooling company to square up any outstanding 2019 tax.

All that information’s on our website if you’re in that position.

The numbers we’re seeing suggest there is quite a substantial portion of 2019 tax outstanding. But what IRD has done here around the tax pools gives another nine months or so to pay. That’s going to be your best bet to tidy it up without incurring other interest and penalty costs.

And this payment would involve your tax pooling rates of interest which are substantially lower than Inland Revenue’s 7% rate.

Josh Taylor
Absolutely, depending on how we structure it and there’s a couple of ways we can do that.  You’re looking at interest rates probably somewhere between 3 to 4 1/2%. And no [late payment] penalties added in. Again, the contrast to these rates being that if you don’t use a tax pool, you can be liable for that 7% use of money percent interest all the way back to 7th May 2019 which is obviously going to cost more.

That leads nicely on to my next question.  I often tell clients about tax pooling and one of its big advantages is how it can assist with short term cash flow issues, just like we’re talking about. So how are clients using tax pooling? What happened once the impact of the pandemic became very clear? What do people do in that situation?

Josh Taylor
So we’ve seen three pretty clear examples of how they’ve used it specifically in relation to the pandemic. We’ve got a couple of examples that might be helpful and give that some context.

The first one was a large client in the forestry sector. And come the middle of March, as the financial markets started to get very constrained forestry was one of the areas, along with tourism, that felt the impact of Covid very quickly. And so for this client they had had a very profitable 2020 financial year but then coming into April forestry has stopped working.  But their mills and everything else they’ve still got going, incurring substantial overheads on a weekly basis running into hundreds of thousands of dollars.  And it wasn’t clear what their traditional bank funding could do for the sort of cash crunch that they and everyone else was experiencing.

What they were able to do is say, “Look, we’ve got about $8 million of tax that we’ve paid which is sitting in a tax pool. With the benefit of hindsight, we wouldn’t actually have paid that tax because we kind of need the money in our business now and IRD doesn’t require us to file our return until March 2021. So we’ve got a window of time where we can actually pull that money out of the tax pool and use it in our business just to keep working capital going. And we’ll repay it back into the tax pool before we file our 2020 tax return in March 2021.”

So, they contacted us. We were able to help them using what we call our Deposit Plus facility. You’ve made a deposit, but you need the money back. We were able to fund it back to them at a cost of around 3%. And they’ll repay that once they’re through this period before they file their return.  So it’s a little bit like the loss carry back the IRD introduced, except in this case, they didn’t even need to have a loss to get the money back into their business.

The next example was a commercial landlord with four shopping centres. They had a 7th May provisional tax payment. But through that period, we were locked down so the cash flow just stopped as the tenants aren’t paying them. So if the tenants aren’t paying, it’s very hard for them to pay their bills. So again, they were saying, “Look, we know we’re going to be taxable for the March 2020 year, but we don’t actually have the cash flow to make that 7th May tax payment.” And because they’ve been profitable, they didn’t meet the definition for the use of money interest remission as they were outside that criteria.

Again they contacted us and said: “Give us five months, we think by October 2020, things will be back up and running so we can pay it off then”. So, we funded this debt payment for them again at an interest rate of under 3%. The nice thing about finance, though, is that it does mean that if they get to October and things haven’t quite come right, we can easily extend for another couple of months. So, they do still have some extra flexibility there.

In the final example we saw was with self-employed and smaller tax payers who maybe only have $10,000 of provisional tax to pay. We saw a lot of them financing their 7th May provisional tax payments as well. This gave them certainty, it allowed them to say “We’ve dealt with the tax. We’ve bought ourselves some time to get through this cash flow crunch that we went through during lockdown once we’re through that period.” And you know, for some people it’s three, or six months and for  others it’s a bit longer. But it helps them get through this period and then they can deal with the tax once the cash flow starts to move again. So these are the sort of examples of what we’re seeing going on.

Fantastic. That really demonstrates the flexibility of tax pooling.  Now you touched on the tax loss carry back scheme which has been brought in.

For some of us it didn’t seem immediately clear how it might help clients with 31 March balance dates.  In fact, tax pooling could probably come through and help out in those cases. Would you like to clarify how that could work out?

Josh Taylor
Sure. There’s a couple of areas where the overlay of tax pooling, really helps make the loss carryback regime work better. The first is obviously if you’re not already paying your tax into a tax pool, it’s a great idea to start doing that because everything about loss carry back regime is going to become easier if you’ve got your money in a tax pool as it provides you more flexibility.

The reason that flexibility is important is because if you’re paying tax directly to Inland Revenue and you estimate a loss under the loss carryback, it actually takes you out of the concessionary uplift regime. You are then into the estimation regime and you are going to be liable for full use of money interest across all your provisional tax payment dates.

Now, if you’ve made those payments into a tax pool, all that you’re doing when claiming the loss carryback is pulling your money back out of a tax pool. You don’t need to advise Inland Revenue to do that, so you can actually preserve your uplift status and still have access to your credits without losing the ability to remain in the uplift regime. So that’s the first important point.

The second one is that through tax pooling, you’re able to reinstate any overclaimed tax credits at a much lower cost. So, we would be able to talk about interest rates around 3 or 4% versus Inland Revenue’s 7% interest rate. When you’re estimating the loss to carry back, there’s obviously a little bit of guesswork. It’s not going to be an exact science. You could easily end up claiming too much and then needing to repay it. So obviously, repaying at a lower cost is better.

And finally, even if you’re not in a loss or you don’t nicely make the definition of a tax loss, you can still actually pull your money out regardless, like that forestry client I mentioned.  Looping back to your start point, Terry, because of the way these balance dates fall like you said, for most of the 31 March 2020 balance date taxpayers Covid was a significant hit for maybe a week or two of that year. So I wouldn’t expect too many people to be in a loss for the March 2020 year or if in the worst case of it would be a very small loss.

Now, the temporary loss carry back lets you offset a loss in one period against the profit in the prior period. If you’ve got a small loss in the March 2020, you can claim that against 2019. But a small loss isn’t really helpful for you right now because a small loss is only going to mean a small amount of money back in your business. What you need is a big amount of money back in your business right now. So that’s not going to be that useful.

If you had a profitable 2020 and then you’ve been looking at 2021 in estimating the loss, it’s hard to know exactly what 2021 is going to look like. Now we’re talking to a lot of people. One retail client did three months’ worth of business in the last month.  So, you know there’s some interesting dynamics in the market at the moment. Could be a loss, might not be a loss. You know, again, if you end up claiming too much, you’re then going to have to pay it back anyway. So although it’s a good idea having the loss carry back, I just don’t think it’s going to be a silver bullet.

Yeah, that’s my thoughts on it. I think it’s something we do need in the system, but right now it’s a bit of a head scratcher as to exactly how it will work.

So, what are you seeing now? I mean, there the 28th June provisional tax payments have just gone through.  What are they like compared to previous years?

Josh Taylor
I was just looking at those numbers. And what we’re seeing are two stories going on. If we look at some of our clients, the payments they’re making this year are almost unchanged from what they were making twelve months ago. So that’s their part of the economy sailing through relatively untouched by Covid.

Then we’ve got the other half of it who are taxpayers who are very much impacted. And the ones we’ve seen, particularly around the construction sector where they were paying provisional tax last year, they’re not paying tax this year.

So, there are these two stories going on. And I think what we don’t know yet is just what the overall weighting of the economy is. Are we seeing half the economy going the same as it always has, and half the economy is very much impacted?  Or is 70% of the economy is going along fine and is it 30% that’s impacted?

From what we can see, we don’t have enough data to be able to make a judgement call on that. But the pleasing thing to see is there is a reasonable portion of the economy which does seem to be continuing on relatively unaffected by Covid. So hopefully that can help provide a carry through momentum.

Let’s hope so. Well, I think we’ll leave it there. Thank you very much, Josh, for coming on. So that’s it for this week. Thank you again to my guest Josh Taylor of tax pooling company Tax Traders.

I’m Terry Baucher and you can find this podcast on my website or wherever you get your podcasts. Please send me your feedback and tell your friends and clients. Until next time have a great week. Ka kite āno.