Paying your taxes on time

ARTICLE Deborah Carlyon

It’s tax time again. Who hates filing their returns? Many of us find the whole prospect of doing paperwork is bad enough, whilst others are more worried about the outcome.
Although they’re quite likely to discover the IRD owes them some money, what if the opposite is true? What if they find they owe the IRD money? It just seems too horrible to contemplate.
Here’s what happens if you put off your taxes for too long. First, if the IRD does owe you money, then you’ve lost the use of that cash. But let’s say you owe some taxes and now you’re late. From Day One of being overdue, the IRD will charge penalties, and these escalate the longer you delay repayment.
Why put off the inevitable? After all, it’s easy to visit the IRD online and it seldom pays to delay.
We all succumb to procrastination. You wait until the last minute to buy Christmas presents. You put off seeing the dentist. You need to get your car serviced. You forget to renew the dog licence. You want to do what’s best – and you will, when you get around to it!
Studies over the years have identified some key reasons for our tendency to avoid doing the right thing. Take our Time-Inconsistent Preferences.
When asked if you would rather have cake or fruit one week from now, you will usually say fruit. Naturally you want what’s best for your future self. A week later when the slice of chocolate mousse cake and the apple are offered, you are statistically more likely to go for the cake. It is human nature to choose ‘want’ over ‘should’.
You are also foiled by something called Present Bias – being unable to grasp what you want will change over time. Present bias explains why you buy lettuce and bananas only to throw them out later when you forget to eat them. You are full of good intentions, like joining the gym but rarely going.
Essentially, you are bad at predicting your future mental states and have difficulty choosing between now or later. Later is a murky place where anything could go wrong. Standing in the here and now, we lose perspective. It’s a psychological trick that we play on ourselves – one that economists call Hyperbolic Discounting; which means we’ll take $50 in the hand right now rather than the prospect of $100 a year later.
With our predispositions conspiring against us, is it any wonder that in the face of complex or unpleasant decisions we tend to procrastinate? Our various procrastinations can cost us big time.
Three really expensive common delays are:
- Delay over retirement plans. The later you leave it, the more money you’ll need to save.
- Not paying bills on time can lead to interest charges, late penalty costs and losing discounts. Time is money.
- Putting off insurance cover, or setting up an emergency fund.
Those delays could leave you deeply in debt in case of sickness, job loss, or the loss of a loved one. If you want tips on dealing with procrastination, try an insightful book “You Are Now Less Dumb” by David McRaney.
And remember, we often make financial decisions in the face of uncertainty. Should we switch our mortgage to a fixed rate? How about making out my Will? These decisions are not actually easy because we don’t have all the information in front of us. How can anyone know how mortgage rates will go over the next 12 months?
The best advice for financial decision-making is to act in a timely manner, but do your homework first.
Here’s a tip; if you are procrastinating on whether to fix part of your mortgage instead of leaving it floating, consider some concrete information from this year’s first quarterly Reserve Bank Monetary Policy Statement.
Mortgage rates are linked to the Reserve Bank’s Official Cash Rate (OCR). The OCR fell to an all time low of 2.5% in March 2011, where it hasn’t budgeted for three years. Hence the plunge in mortgage rates from 10% to 5.5%.
In March 2014, the OCR was increased to 2.75% and again in April to 3%. The Reserve Bank stated that it expects to keep slowly increasing the OCR by a total of two percentage points over the next two years to contain inflation. That implies mortgage rates as high as 7-8% within the next two to three years.
If you can lock in lower rates now, it certainly will pay not to delay.

You might be interested in reading: Buying to renovate for investment – tax changes on the horizon.

This column by Deborah Carlyon featured on page 24 of Issue 011 of New Zealand Renovate Magazine. New Zealand's first and only magazine solely dedicated to home renovations.

 

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*All information is believed to be true at time of publishing and is subject to change.
Deborah is a Certified Financial Planner (CFPCM), a member of the Institute of Financial Advisers (IFA) and an Authorised Financial Adviser (AFA). She is a principal of independent advisory company Stuart + Carlyon. This column does not provide personalised advice. Deborah’s Disclosure Statement is available on request and free of charge by emailing deborah@stuartcarlyon.co.nz.