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Provisional tax is a way of paying your income tax in instalments through the year. The amount you pay during the year is credited against your end-of-year tax to pay.

Who has to pay provisional tax?

If your current year’s residual income tax (RIT) is more than $2,500 you’ll need to pay provisional tax for the following tax year.

Your RIT is calculated from your year end tax return. It is the amount of tax to pay after any source deduction payments such as PAYE, RWT but before any provisional tax payments made.

If the provisional assessment is higher than you expect your tax liability for the coming year to be, you can estimate your provisional tax. However care should be taken as any underestimated balance will incur penalties and interest charges.

What about new provisional taxpayers?

If you’re a new provisional taxpayer, you will not be required to pay any provisional tax for your first year. In your first year of business you should budget and put money aside for income tax payments – this will ease the cashflow in your second year of business, when you will need to pay provisional tax instalments for that year, plus pay the income tax for your first year of business. You can make voluntary payments towards your end-of-year income tax liability at any time during your first year of business. Companies and Trusts are charged Use of Money Interest on outstanding provisional and terminal tax so you may wish to make voluntary payments before the official due date to minimise interest charges.

How many instalments do I need to make?

If you are not registered for GST:

• You will make three instalments.

If you’re registered for GST:

• six-monthly, you will only need to make two provisional tax instalments
• monthly or bi-monthly, and use the standard option, you will make three provisional tax instalments,
• monthly or bi-monthly and use the ratio option, you will make six provisional tax instalments

When is it due to be paid?

If you have a standard 31 March balance date, your provisional tax due dates will be:

• If two installments are due: 28 October & 7 May
• If three installments are due: 28 August, 15 January & 7 May
• If six installments are due: 28 June, 28 August, 28 October, 15 January, 28 February & 7 May

Terminal tax, which is your final tax for the year after adjusting for provisional tax paid during the year, is generally due on 7 April following the year of the tax assessment.

How much will I need to pay?

There are three ways to calculate out how much provisional tax you have to pay for the following tax year – the standard option, the estimation option and the ratio option.

Standard Option

To calculate your provisional tax instalments you add 5% to your RIT for the immediately preceding income year.

• If you have not filed your tax return for the immediately preceding income year, you can still use the standard option to calculate your provisional tax by increasing your last tax assessment by 10%.

Estimation Option

To estimate your provisional tax, estimate your income and then calculate the tax on it. You can re-estimate your provisional tax as often as you like up to and including your third provisional tax instalment due date. At this date your last estimate becomes final. Any underestimated tax balance will incur interest and penalty charges.

Ratio Option (this option is only available to customers registered for GST)

Using the ratio option, provisional tax instalments are based on your GST taxable supplies. IRD calculate a percentage based on your prior year’s residual income tax, divided by your GST taxable supplies for the corresponding year. Provisional tax payments are then made with your GST returns by applying the IRD percentage to your GST taxable supplies.

There are some other criteria that must be met to be eligible for the ratio option – please contact us to discuss if this option is suitable for you.

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Markhams are Chartered Accountants and Business Advisors. They’re a New Zealand network of Chartered Accountancy firms located around the country, providing financial and accountancy services to a wide range of clients.

For more information or specific advice, you can contact Sam or Jess, or visit the Markhams website.

Sam Basset: Phone (09) 306 7103 or email sam.bassett@markhams.co.nz

Jess Galyer: (09) 306 7109 or email jess.galyer@markhams.co.nz

All information in this article is to the best of the Author’s knowledge true and accurate. No liability is assumed by the authors, or publishers, for any losses suffered by any person relying directly or indirectly upon this article. It is recommended that clients should consult a senior representative of the firm before acting on this information. The member firms practicing as Markhams are independent and not in partnership.