As we start a new financial year, it's important to get your Provisional Tax right. We’ll help work out what’s best for you and your business.
What is Provisional Tax?
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.
How does provisional tax work?
Provisional tax splits up your income tax into payments over the year. The frequency of payments varies from as little as twice a year (28 October and 7 May) or as often as monthly.
Your due dates will depend on whether you are registered for GST and which payment option you choose. There are [four payment options] (https://www.ird.govt.nz/income-tax/provisional-tax) available:
The standard option
The estimation option
The ratio option
The accounting income method (AIM).
The standard option for provisional tax is calculated on your previous year’s income tax, plus 5%. That number, divided by how many times each year you opt to pay, is what you’ll owe for each installment. Talk to us about the other options, and which one might be right for you.
If you think that your income is going to be substantially more or less than last year we may be able to estimate a more accurate figure. We can help you figure out how to determine your payment option as well as calculating your payments.
We can help you navigate provisional tax
You can [read more on provisional tax here] and we can provide you with tailored advice for your life and your business.
We can make sure you don’t pay too much tax, figure out an optimal frequency for your situation, and help your cashflow remain steady.
Get in touch, we’d love to hear from you.