If you had to pay tax of more than $5,000 in your last income tax return, you may have to pay provisional tax for the following year. Provisional tax is like paying progress payments on next year’s income tax.
The amount you have to pay relates to your expected profit for the year. In practical terms, the amount of provisional tax you’re expected to pay is based on the tax you were liable for in the previous year, often referred to as residual income tax (RIT).
Even if you are not required to pay provisional tax, you may still elect to do so, to spread your tax obligations over the year. This can help you manage cash flow and take away the pressure of paying a lump sum at the end of the year.
For a new business, the first-year provisional tax payment can be tough. You must pay last year’s income tax at the same time as the first instalment of next year’s provisional tax. There are a couple of ways we can help you reduce the pain.
If you are self-employed or a partner in a partnership you may be entitled to a discount of 6.7% on your first year’s income tax. This is to encourage you to pay tax early and relieve the financial strain before you must pay provisional tax for the first time.
You may also be eligible purchase tax credits, this can be done through an approved tax pooling company. If you know you are not going to be able to pay your tax on time get in touch and we can arrange these. They credits will be applied to your tax account at the due date and you will pay them back at a lower interest rate than what you would have paid to the IRD, without the penalties!
COVID-19 and provisional tax
In order to shrink compliance costs for smaller taxpayers and allow them to retain cash for longer, the government introduced some tax relief measures that affect the normal rules for provisional tax:
The threshold for provisional tax increased from $2,500 to $5,000 from the 2020/21 tax year. This means any current provisional taxpayers with provisional tax payments of less than $5,000 will have until 7 February following the year they file to pay their tax bill.
Depreciation for commercial and industrial buildings is reintroduced from the 2021/22 income year. If you are a building owner, you will be able to adjust provisional tax payments immediately in anticipation of additional deductions that become available.
If your business is affected by COVID-19 and:
you need to re-estimate your provisional tax as your income falls short of the estimate and provisional tax has been overpaid, it may be possible to arrange early refunds.
if you are unable to pay tax by the due date, Inland Revenue has discretion to write-off penalties and interest. You may be eligible for a UOMI (use of money interest) write off.
We would need a crystal ball to predict your results for the year. But we will review your results before every provisional tax installment to ensure you are paying the correct amount and protecting your cashflow.
It’s important to keep your tax plan current. If circumstances change for your business, we need to adjust your plan. Let us know as soon as you can about the situation for your business.