IR UOMI Proposed Law Change

The Government is proposing to change the process for setting use-of-money interest (UOMI) rates. The key change involves shifting the power to set these rates from an Order in Council to a determination made by the Commissioner of Inland Revenue.

The Bill proposes to statutorily vest the power to set UOMI rates in the Commissioner of Inland Revenue. This change is intended to streamline the process, reduce the administrative burden on Ministers and Cabinet, and allow UOMI rates to respond more quickly to changes in market interest rates.

The new process will involve the Commissioner reviewing Reserve Bank of New Zealand (RBNZ) data, calculating the rates using legislated formulas, and then publishing the new rates in a determination. This determination will be a form of secondary legislation.

The proposal is included in the Taxation (Annual Rates for 2025-26, Compliance Simplification, and Remedial Measures) Bill. The Bill amends the Tax Administration Act 1994 (TAA) and the Income Tax Act 2007 to empower the Commissioner to set UOMI rates, the Fringe Benefit Tax (FBT) prescribed interest rate, and the deemed rate of return for certain foreign investment funds.

What isn't proposed to change is the formulas for setting the two UOMI rates.

The new process will allow UOMI rates to be adjusted much more quickly in response to market fluctuations. The current system can result in significant delays, meaning the rates can become misaligned with market reality. The expectation is that change would occur within six to eight weeks as opposed to the historical four months.

How is UOMI Rate set?

The proposal will codify the existing, well-established formulas for setting the two UOMI rates. These formulas are designed to encourage timely payment of tax without creating an incentive for taxpayers to use Inland Revenue as a financial intermediary.

Debit Rate on Underpayment of Tax

Formula: The RBNZ floating first mortgage new customer housing rate + 250 basis points (2.5%).

Rationale: The floating mortgage rate is used as a proxy for a debt a taxpayer might prioritise over their tax obligations. The 2.5% margin is added because Inland Revenue is an involuntary and unsecured lender and cannot assess a taxpayer's individual creditworthiness.

Credit Rate on Overpayment of Tax

Formula: The RBNZ 90-day bank bill rate - 100 basis points (1%), with a floor of 0% (the rate cannot be negative).

Rationale: The rate is set below market deposit rates to discourage taxpayers from deliberately overpaying tax as a form of investment, which would be guaranteed by the government.

How can I mitigate exposure to UOMI?

UOMI is not designed to penalise—it is designed to remove any financial advantage from getting tax timing wrong. That means the responsibility ultimately sits with taxpayers to manage both timing and cashflow effectively.

"Cash flow is a fact. Profit is an opinion.” — Unknown

Proactive tax planning is key. Ensuring funds are set aside as income is earned, and forecasting upcoming tax liabilities, will significantly reduce exposure. This is particularly important in periods of growth, where increased profitability can quickly translate into larger tax obligations.

For those who may face timing mismatches, tax pooling and tax deposit solutions can provide flexibility. However, for smaller liabilities (generally under $10,000), the cost-benefit of these options should be carefully assessed.

With UOMI rates expected to adjust more frequently under the proposed changes, the margin for error narrows. Staying ahead of your tax position—rather than reacting to it—will be increasingly important.

In a more responsive UOMI environment, discipline—not delay—will determine the cost of getting tax wrong.

If you want to discuss how this change might affect your business, particularly with terminal tax looming on 7 April, closely followed by 3rd instalment for Provisional Tax, book a call with one of our team for tailored advice. https://www.businessstudio.co.nz/book-online

Disclaimer:The information provided in this article is general in nature and does not constitute personalised tax advice. You should consult with Business Studio before making decisions based on this content.