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  2. Tax Pooling 101

Deposits vs purchased funds

The important differences between deposits and purchased funds

Available balances in the tax pool can be split into purchased funds and deposited funds.

Deposits are much more flexible than purchased funds. Therefore it is important to know the difference.

Deposited funds or own-funds deposits are 'cash' deposits in the tax pool; they generally arise from a client paying cash directly into our tax pool account. However, they can also arise from:

  • proceeds from tax sales re-deposited in the pool,
  • credit use-of-money interest returns applied to the pool, or
  • reimbursements of finance fees deposited back in the taxpayer's account (for example for unused finance arrangements subject to feeGuard)

Purchased funds are usually the result of buying tax for a specific tax date that are still held in the pool - that is, they are yet to be transferred to Inland Revenue. But they also result from having:

  • residual purchased funds following transfers being completed, and
  • swap transactions.  

Why is it important to know whether funds are purchased funds or deposit funds?

For any given tax year, a taxpayer has up to 75 days after their terminal tax date to transfer any purchased funds to Inland Revenue and retain their effective tax date. After 75 days of a taxpayer's terminal date, purchased funds lose their effective tax date.

This means that Inland Revenue will treat a transfer of those funds to that tax year as only paid on the date of the transfer, and any penalties and interest accrued will not be eliminated However, deposit funds can be transferred to Inland Revenue for a given tax year at any time and retain the original tax date of the deposit.

In addition, only deposit funds can be on-transferred to meet another liability of a different tax type. If you are wanting to use your tax pool funds for a tax type other than income tax, you must ensure they are deposit funds before proceeding (unless it is a reassessment). 

FAQs

How do I know if my taxpayer's funds are deposit funds or purchased funds?

On your taxpayer’s dashboard, we provide a Tax Pooling Summary which will identify funds available in your taxpayer’s account based on a specific tax period. Each line of available funds will have a note detailing whether the funds are purchased funds or deposit funds.

My taxpayer has purchased funds sitting in the pool that relate to a tax year that is closed for tax pooling. What are my options?

You can:

  • Swap these funds to a future tax year when tax pooling can still be used.
  • Sell the funds and receive a refund.

I only have purchased funds left on my taxpayer's account but my taxpayer is short of funds and I need them to meet another tax type liability. Is there anyway I can use these funds or do I just have to get them paid back to my taxpayer?

The only way purchased funds can be used to assist with meeting another tax liability is to sell the funds. We can make a direct cash payment of the sale proceeds to IRD on the selected processing day (normally the Friday following the transaction being submitted, but will otherwise be the sale date selected on the sell estimate) and have this directed to the tax type and period your client requires.

It is important to note that sale proceeds are dated as at the sale date (not the date of the purchased funds), so if the due date of your other tax liability has passed already, the proceeds sent across will not mitigate all interest and penalties which have been applied to the account. It is preferable if you are aware of a client being in this situation to ensure the sell and the instructions required are set up and supplied to us prior to the tax being due to minimise the additional costs the client may incur.

Please note supporting evidence of the other tax liability will be requested by our team before the sell can proceed.