Tax Facts
Provisional Tax
Provisional Tax is not a separate tax
but a way of paying your income tax as the income is
received through the year. You pay instalments of income
tax during the year, based on what you expect your tax
bill to be. The amount of provisional tax you pay is
then deducted from your tax bill at the end of the year.
If your residual income tax is $2,500 or more you will
have to pay provisional tax for the following year.
Residual income tax is basically the tax to pay after
subtracting any rebates you are eligible for and any
tax credits (excluding provisional tax). Residual income
tax is clearly labelled in the tax calculation in your
tax return.
There are three options for working out your provisional
tax: standard, estimation, and ratio (available from
2008-2009 year onwards).
Note the government has reduced the tax uplift rates
for the 2008/2009 and 2009/2010 income years.
Standard option
The IRD automatically charges provisional
tax using the standard option unless you choose the
estimation or ratio options. Under this option:
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Your provisional tax payable is your previous
year's residual income tax plus 5% |
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Changes in tax rates may have an effect on the
calculation of your provisional tax |
Estimation option
The other way to work out your provisional tax is
to estimate what your residual income tax will be. When
working out the tax, keep the following points in mind:
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To get the right tax rate -
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Add up all your estimated income
|
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Work out the tax on the total |
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Subtract any tax credits (like PAYE) |
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Using the estimation option, if your estimated
residual income tax is lower than your actual residual
income tax for that year, you may be liable for
interest on the underpaid amount |
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You can estimate your provisional tax as many
times as necessary up until your last instalment
date. Each estimate must be fair and reasonable |
Ratio option (for 2008-2009 onwards)
From the start of your 2008-2009 income year you can
base your provisional tax instalments on a percentage
of your GST taxable supplies. You will be able to use
the ratio option if:
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You’ve been in business and GST-registered
for all of the previous tax year, and the tax year
prior to that |
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Your residual income tax for the previous year
is greater than $2,500 and up to $150,000 |
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You file your GST returns every month or every
two months |
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The business you’re operating is not a partnership
|
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Your ratio percentage that IRD calculates for
you is between 0% and 100% |
The ratio will be calculated by applying the following
rule:
Ratio Percentage = Residual Income Tax from previous
year/GST Taxable Supplies from previous year x 100/1
Due dates
The due date and amount of instalments you need to
make for payment of your provisional tax each year depends
on your balance date, which of the above options you
use and how often you pay GST (if registered).
If you have a 31 March balance date and use the standard
or estimation option or are also GST Registered on a
1 or 2 monthly basis, the provisional tax payments are
due on:
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First instalment |
28 August |
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Second instalment |
15 January |
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Third instalment
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7 May |
Interest
In some circumstances you may be charged
interest if the provisional tax you paid is less than
your residual income tax. If the provisional tax you
pay is more than your residual income tax, the IRD may
pay you interest on the difference.
For futher information on provisional tax, due dates
and changes made by IRD refer to the IRD
Website.
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