PKF Francis Aickin Limited, Far North, New Zealand
view all of our services
13 Feb 2020
The concept of provisional tax is that the taxpayer pays tax on income during the period income is being derived. An individual or entity becomes a provisional taxpayer when their residual income tax (RIT) exceeds $2500. RIT is the amount of tax on the income for the year less any tax credits such as tax deducted from interest, PAYE etc.
There are three options for calculating provisional tax:
STANDARD: The default method - each instalment is one third of 105% of the previous year’s RIT.
ESTIMATION: On or before the due date for an instalment, you can make a fair and reasonable estimate of your RIT for the current year. The estimate must be changed for any significant increase during the year. Use of money interest is payable at 8.35%, calculated daily, or receivable (0.81%) on any difference of actual to estimate.
GST RATIO: Bases current year’s payments on the GST gross taxable supplies - it attempts to align tax payments with cash flow, so may be beneficial for taxpayers with seasonal income. It is available to monthly or two-monthly GST-registered taxpayers whose prior year’s RIT was less than $150,000. The tax is paid with six two-monthly GST payments.
Apart from those using the GST ratio option, provisional tax is paid three times per year. For a taxpayer with a March balance date, the instalments are due 28 August, 15 January and 7 May. For a taxpayer registered for six-monthly GST, only two provisional tax payments are required at the time GST is paid.
The term “safe harbour taxpayer” is often used in relation to provisional tax. As long as the “standard method” is used and RIT is less than $60,000, no interest applies, unless the tax is not paid by due dates.
If you can’t afford to make a tax payment on time, overlooked a payment, or just haven’t paid enough, there are ways around being subject to expensive IRD interest and late payment penalties. First step is to contact your tax advisor before making any correcting tax or penalties’ payments.
PKF NZ member firms are premium partners with New Zealand’s largest tax pooling company – Tax Management NZ (TMNZ). This gives us the ability to buy backdated payments (subject to time limitations), thus eliminating late payment penalties and saving up to 30% on IRD interest rates.
TMNZ also provides tax planning flexibility for future payments and handling tax for multiple-entity groups.
If you are still confused by provisional tax and its application to your situation, feel free to speak to one of our team, who will be happy to explain.
For more information on how we can help your business, get in touch