What is Provisional Tax?
- It is not a separate tax.
- It is a means of paying your income tax.
- It allow you to pay instalments of tax during the year based on your predicted income.
- Your provisional tax payments are then deducted from your tax bill at the end of the tax year.
Residual income tax of $5,000.00 or more requires provisional tax payments for the following year.
What is Residual Tax?
- The tax owing after subtracting any rebates or tax credits that you are eligible for.
- Residual Tax is clearly labelled in the tax calculation in your tax return.
How do I calculate my Provisional Tax?
There are 2 ways to do this plus a third GST Ratio option if you meet certain criteria.
Please see options below:
Standard Option:
- The IRD automatically uses the standard option unless you choose the estimation or ration option.
- The standard option is based on an adjustment of your residual income tax from the previous year.
- Your previous year’s residual income tax with an uplift of 5% added.
- If you have not filed your previous year’s income tax return, it will be calculated on the prior year but with an uplift of 10% added.
Estimation Option:
- You can estimate what your residual income tax will be.
- Add up all your estimated income.
- Work out the tax on the total.
- Subtract any tax credits (eg PAYE).
- You can estimate your provisional tax as many times as you like up till your last instalment date.
- These estimates must be fair and reasonable.
- If your estimated residual income tax is lower than your actual residual income tax for that year, you may be liable for interest on the unpaid amount.
Due dates for Provisional Tax:
- First instalment: 28 August
- Second instalment: 15 January
- Third instalment: 7 May
Interest:
Will I be charged interest if I underpay my Provisional Tax?
Yes.
What happens if I overpay my Provisional Tax?
The IRD may pay you interest on the difference
What is the GST Ratio Option for payment?
- If you are registered for GST you may pay your provisional tax at the same time as your GST payments.
How do I qualify for the GST Ratio Option?
- You have been registered for GST and have been in business for the 2 prior full tax years
- Your residual income tax for the previous year is greater than $2,500 and up to $150,000
- You file your GST returns every month or every 2 months
- The business that you are operating is not a partnership
- The ration that the IRD calculates for you is between 0% and 100%
This payment option may not suit everyone. We advise that you speak to your accountant for professional advice or give us a call to discuss further with you.
For more information please call us on 09 373 4544 or visit: https://www.ird.govt.nz/income-tax/provisional-tax
Get the right advice
Let’s make a time to discuss your needs and answer any questions you may have.