Provisional Tax‚Äč

Provisional Tax


 
Provisional Tax is a method of paying tax for business owners and individuals who earn income that is not subject to PAYE.  

A tax payer is liable to pay provisional tax if based on their last income tax return, their residual income tax was more than $2,500.  

Residual income tax is the amount of tax calculated on taxable income, less any tax credits such as PAYE, Resident Withholding Tax or imputation credits.  

Provisional tax is paid in instalments, and generally there are three instalments unless you are registered for GST on a six monthly basis, in which case there are two instalments.

On the filing of an income tax return, a washup calculation is made where the provisional tax paid is deducted from the residual income tax payable, resulting in either a tax refund or further tax to pay.

For a balance date of 31 March each year, the due dates for tax payments are as follows:

  If your're not   registered for GST If you're registered for GST and pay monthly or two monthly  If you're registered for GST and pay every six months 
 First Installment  28 August  28 August  28 October
 Second Installment  15 January 15 January  7 May
 Third Installment  7 May  7 May  -


If you have a 31 March balance date and calculate provisional tax using the ratio option, then the due dates are as follows:

31 March Balance Date Date Due
First Installment 28 June
Second Installment 28 August 
Third Installment 28 October
Fourth Installment 15 January
Fifth Installment 28 February
Sixth Installment   7 May


There are three methods of calculating provisional tax which are the standard option, the estimation option and the ratio option.

The standard option calculates provisional tax according to the last income tax return filed.  If the previous year's income tax return has been filed, the provisional tax amount is the residual income tax plus 5%.  If the previous year's tax return has not been filed, then the calculation is the residual income tax of the year prior to the previous year plus 10%.

The estimation option allows tax payers to estimate the amount of provisional tax that they pay based on their estimate of profit for the year.  Any taxpayer who estimates their provisional tax, will be subject to use of money interest should it later be calculated that insufficient provisional tax has been paid.  

The third method of calculating provisional tax is the ratio option.  The ratio option is calculated as follows:

Individuals

 Tax Year 2014 RIT X 100 2013 RIT x 100
 
2015
________________________
( 2014 taxable supplies -
asset adjustment)
________________________
2013 taxable supplies -
asset adjustments


Companies

 Tax Year 2014 
2015
_____________________________________
2014 taxable supplies - asset adjustments


In the first year of business, no provisional tax is required to be paid because the residual income tax in the prior year is zero.  However, what this does mean is that in the second year of business, effectively two years tax will be required to be paid.  One year for the year you are currently in, and one year for the year just passed.  Note that if no provisional tax is paid in the first year, it is likely that use of money interest will be charged by the IRD, so there is a cost to the taxpayer if no tax is paid.  

In certain circumstances where a taxpayer finds that insufficient tax has been paid, there is the ability to purchase tax through a tax intermediary.  There is a cost of this service, however the cost is usually less than the use of money interest that otherwise would be payable.

For an individual who is an employee of a company, in order to pay provisional tax rather than have PAYE deducted, the employee must also be a shareholder.  

In the years when income tax rates may change, the government may make adjustments to the standard option of calculating provisional tax to allow for the income tax changes.  

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 First Installment  28 August  28 August  28 October
 First Installment