PROVISIONAL TAX- WHAT IS IT AND HOW DOES IT WORK
Provisional Tax is tax paid as you go for people in business. It is not a separate tax. When you fill in your Income Tax Return to calculate your end-of-year tax bill, you deduct the provisional tax you have paid during the year, so the end result is that you will not pay tax twice.
Generally you pay
Provisional Tax in a particular year if in the previous income year your
Residual Income Tax (which is the income tax that is calculated that you have to
pay after deducting rebates you can claim and also all tax paid during that year
except for provisional tax) was $2,500 or more.
You are, however,
liable for Provisional Tax in the first year of business in the following
circumstances:
| If you are an individual and you
stop receiving income from employment and begin to derive gross income from
a business, and your residual income tax for the past four years was less
than $2,500 per year, and your residual income tax for the current year
exceeds $30,000. |
| You are a non-individual (e.g. a
company) who commenced business during the year and have not been deriving
business income in the previous four years and your Residual Income Tax
calculated at the end of the year is $2,500 or more. |
There are two options for working out Provisional Tax payable:
| Standard Option-
under this option the Provisional Tax to pay is the previous year
Residual Income Tax plus 5%. If
in the Income year you pay the Provisional Tax it is subsequently found that
you have underpaid the Provisional Tax in comparison to your calculated
Residual Income tax liability you are not charged penalties (unless your
residual income tax turns out to be $30,000 or more), and if was too much
IRD will not pay you interest for this. |
| Estimation Option- under
this option you can estimate your Provisional Tax if you believe it will be
different than the previous year Residual Income Tax plus 5%.
If it is subsequently
found that you have underpaid the Provisional Tax in comparison to your
calculated Residual Income Tax liability for the year you will be charged
interest, and if you have you have overpaid IRD will pay you some interest
for doing so. |
Once you make an estimate, you cannot change to the standard option for that year. You can re-estimate any number of times up to your third instalment date, when your last estimate becomes final
Most businesses tend to select the Standard Option, unless they believe the following year profit will be significantly different.
If you don’t
believe your Residual Income Tax in the following year will be $2,500 or more,
even though you paid Provisional
Tax in the current year, you can choose the Estimation Option and estimate Nil.
If this turns out to be the case you will not be liable for interest, but
if you were liable to pay Provisional Tax you will be charged interest by IRD.
Provisional Tax is
payable in three instalments, on the 7th day of the 4th, 8th
and 12th calender months after the
previous year balance date. For
example if you have a 31 March balance date, Provisional Tax payments are due on
7 July, 7 November and 7 March.
If you are registered
with a tax agent and you were not liable to pay Provisional Tax in the previous
income year but are liable in this income year you can escape paying in the
three instalments if your Income Tax Return for the previous year has not been
filed in time for an Instalment, but instead you must pay the full liable amount
but in two instalments (7 November and 7 March) or in one instalment (7 March)
after the date the Income Tax Return is filed.
If your Provisional
Tax instalments are paid late or are short paid, you incur penalty an interest
charges in relation to the late or under payments.
If the Provisional
Tax paid during an income year is more than the Residual Income Tax calculation
at the end of the income year, you will get an income tax refund fror the
difference. If it is less,
you will have to pay the difference to IRD.
Many businesses have
a free year in the first year from paying income tax (due to the fact that they
don’t have to pay income tax until their first year Income Tax Return is
processed) , but then find that they have to pay two lots of income tax in their
second year of business (being the tax calculated for their first year plus
Provisional Tax for the second year).
It is this factor which causes a number of businesses to fail in the
second year due to the fact that the business has not been budgeting and putting
money aside in the first year. The
IRD will accept voluntary payments in the first year even though they are
technically due then, and this is an option that businesses should consider if
the owners believe that the amount will not be able to be saved otherwise.
Some taxpayers are
slow in filing returns each year, and due to this are not sure exactly what
should be paid in Provisional Tax each instalment.
In this instance, if it is the belief that Provisional Tax will be
payable as it is expected that Residual Income
Tax will be more than $2,500 in that income year,
Provisional Tax instalments should still be paid on due dates based on
the previous year instalments plus 10% to escape or minimise penalties.
If we can assist further, please email TotalAccounting as follows:
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