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 you have a 31 March balance date and calculate provisional tax using the ratio option, then the due dates are as follows:
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
Companies
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 interest use of money 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.
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 Instalment | 28 August | 28 August | 28 October |
| Second Instalment | 15 January | 15 January | 7 May |
| Third Instalment | 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 Instalment | 28 June |
| Second Instalment | 28 August |
| Third Instalment | 28 October |
| Fourth Instalment | 15 January |
| Fifth Instalment | 28 February |
| Sixth Instalment | 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:
| Tax Year | 2010 RIT X 100 | 2009 RIT |
| 2011 |
________________________ ( 2010 taxable supplies - asset adjustment) |
________________________ 2009 taxable supplies - asset adjustments x 100 |
Companies
| Tax Year | RIT Previous Year |
2011 |
________________________
2010 RIT 2010 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 interest use of money 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.
