Tax Facts - Provisional Tax
Provisional Tax is not a separate tax but a way of paying your
income tax as the income is received through the year. You pay
instalments of income tax during the year, based on what you
expect your tax bill to be. The amount of provisional tax you pay
is then deducted from your tax bill at the end of the year.
If your residual income tax is $2,500 or more you will have
to pay provisional tax for the following year. Residual income tax
is basically the tax to pay after subtracting any rebates you are
eligible for and any tax credits (excluding provisional tax).
Residual income tax is clearly labelled in the tax calculation in
your tax return.
There are two ways of working out your provisional tax. One is
the standard option and the other one is the estimation
option. If you are also registered for GST and meet the other
eligibility criteria, the ratio option may be available to you as
well (see below for more on the GST Ratio option).
Standard option
The IRD automatically charges provisional tax using the standard
option unless you choose the estimation or ratio
options.
The standard option takes your residual income tax for the previous
year and makes an adjustment. The calculation for the
adjustment from the current year is:
- your previous year's residual income tax with an uplift of 5%
added
- if the previous year's income tax return has not been filed, it
will be the year prior to the previous year with an uplift of
10% added
Estimation option
The other way to work out your provisional tax is to estimate
what your residual income tax will be. When working out the tax,
keep the following points in mind:
- To get the right tax rate -
- Add up all your estimated income
- Work out the tax on the total
- Subtract any tax credits (like PAYE)
- Using the estimation option, 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 underpaid amount
- You can estimate your provisional tax as many times as
necessary up until your last instalment date. Each estimate must be
fair and reasonable
Due dates
The due date and amount of instalments you need to make for
payment of your provisional tax each year depends on your balance
date, which of the above options you use and how often you pay GST
(if registered).
If you have a 31 March balance date and use the standard or
estimation option, provisional tax payments are due on:
First instalment |
28 August |
Second instalment |
15 January |
Third instalment |
7 May |
Interest
In most circumstances you will be charged interest if the
provisional tax you paid is less than your residual income
tax. If the provisional tax you pay is more than your
residual income tax, the IRD may pay you interest on the
difference.
Another Option - the GST Ratio Option
If you are also registered for GST you are able to pay your
provisional tax at the same time as your GST payments. You
will be able to use the ratio option if:
- You've been in business and GST-registered for all of the
previous tax year, and the tax year prior to that
- Your residual income tax for the previous year is greater than
$2,500 and up to $150,000
- You are liable to file your GST returns every month or every
two months
- The business you're operating is not a partnership
- Your ratio percentage that IRD calculates for you is between 0%
and 100%
This method of paying provisional tax may not suit
everyone. Solutions such as tax pooling can also be used to
ease taxpayers' concerns and costs in calculating provisional
tax. We suggest that you discuss your options with your
accountant.
For further information on provisional tax give us a call or
refer to the IRD Website.
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