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. The way this works is during the tax year, you pay instalments of income tax, 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 that tax year.

If your residual income tax is $5,000 or more you will have to pay provisional tax for the following year. Residual income tax is basically the tax you pay after subtracting any rebates you are eligible for and any tax credits (excluding provisional tax). Residual income tax is then clearly labelled in the tax calculation in your tax return.

There are two ways of working out your provisional tax. 

One is the standard option and the other one is the estimation option. If you are also registered for GST and meet the other eligibility criteria, then a third option, known as the GST ratio option may be available to you as well.

Standard option

The IRD automatically charges provisional tax using the standard option unless you choose the estimation or ratio options.

The standard option takes your residual income tax for the previous year and makes an adjustment by adding a further 5%. If you have not filed your current tax return, IRD will add 10% to the residual income tax figure of the last filed tax return.

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:

  • To get the right tax rate –
  • Add up all your estimated income
  • Work out the tax on the total
  • Subtract any tax credits (like PAYE)

  • 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
  • You can estimate your provisional tax as many times as necessary up until your last instalment date. Each estimate must be fair and reasonable

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, provisional tax payments are due on:

  • First instalment 28 August
  • Second instalment 15 January
  • Third instalment 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.

Inland Revenue will also charge interest on tax amounts where the residual income tax figure exceeds $60,000. The interest charge will commence from the day after the payment of the first provisional tax instalment.

The GST Ratio Option

If you are also registered for GST you are able to pay your provisional tax at the same time as your GST payments. You will be able to use the ratio option if:

  • You’ve been in business and have been GST-registered for all of the previous tax year, and the tax year prior to that
  • Your residual income tax for the previous year is greater than $5,000 and up to $150,000
  • You file your GST returns every month or every two months
  • The business you’re operating is not a partnership
  • Your ratio percentage that IRD calculates for you is between 0% and 100%

This method of paying provisional tax may not suit everyone. Solutions such as tax pooling can also be used to ease taxpayers’ concerns and costs in calculating provisional tax. 

We suggest that you discuss your options with our tax team.  For further information on provisional tax call our tax team now. 

Book a Complimentary 1 Hour Consult

What our clients say

My Company has been utilising the services of DFKOGC for many years and this itself speaks volumes for the excellent professional services rendered by them. I have been interacting with the DFKOGC team for the past 2 months and I have found them to extremely responsive, very professional and always willing to go the extra mile to service us.

Mary Abraham

We have been dealing with the team at DFKOGC since last 10 years and we have always found them to be very professional and supportive to all our accounting needs.They do have full range of professionals available in the team to cater for all the accounting related Services and very responsive to all the client requirements.

Munish Singla

It’s not so big that you feel like just another number, but it’s also big enough that they can cover everything I need.  I feel comfortable with the fact that as my business grows, DFK OGC will be able to handle the demands that come with it.

Lee Chang Woo

Very efficient and has a personal touch. If you have questions, they respond in a timely manner and even visits you to explain things face to face.

Marlo Camacho

The team at DFKOGC is incredibly knowledgeable and experienced in the field of accounting. They took the time to thoroughly understand our financial situation and provided tailored solutions that perfectly suited our business needs. Their attention to detail and accuracy in handling our accounts give us complete peace of mind. On behalf of Maungakiekie Golf Club, I wholeheartedly recommend DFKOGC to anyone in need of professional accounting services.

Hugo Littlejohn

Extremely professional and astute business advisors. Our businesses has benefitted and elevated to new horizons with DFK OGC by our side. Even when going gets challenging, they are open to seek subject matter experts. Anit Patel and his entire team are great highly recommended.

Sanjai Bagia
Previous
Next