How does NZ Provisional Tax work?

Did you pay more than $5,000.00 in Terminal Tax with your last income tax return? If so, you may have to pay Provisional Tax for the following year. This is due to the threshold that triggers Provisional Tax requirements, which is currently set at $5,000.

Provisional Tax is like making a progress payment on next year’s income tax.  The amount you pay relates to your expected profit for the year.

In practical terms however, the amount of Provisional Tax (PT) 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 don’t need to pay PT, you may choose to do so, as this will spread your tax obligations over the year. This will allow you to manage cash flow and take away the pressure of paying a lump sum at the end of the year.

For a new business, the first-year PT payment can be rough. You must pay last year’s terminal income tax payment (as no PT had been paid that year) at a similar time to the first instalment of next year’s PT.  Don’t despair, there are a couple of ways we can help you reduce this pain.

If you’re self-employed or you’re a partner in a partnership you may be entitled to a 6.7% discount on your first year’s income tax. The purpose of the discount is to encourage you to pay tax early.  This will also relieve the financial strain before you have to pay PT for the first time.

COVID-19 and Provisional Tax

In an effort to shrink compliance costs for smaller taxpayers and allow them to retain cash for longer, the government has introduced some tax relief measures that affect the normal rules for PT:

• The threshold for PT increased from $2,500 to $5,000 from the 2020/21 tax year. This means any current provisional taxpayers with PT payments of less than $5,000 will have until 7th of February following the year they file to pay their tax bill if you do not have a tax agent.  Clients of MBS Advisors will have an extension until the 7th of April.
• Depreciation for commercial and industrial buildings is reintroduced from the 2021/22 income year. If you are a building owner, you will be able to adjust PT payments immediately in anticipation of additional deductions that become available.
• If your business is affected by COVID-19 and:
  • you need to re-estimate your PT as your income has fallen short of the estimate.  If this means that PT has been overpaid, it may be possible to arrange early refunds.
  • if you are unable to pay tax by the due date, Inland Revenue has discretion to write-off penalties and interest. You may be eligible for a UOMI (use of money interest) write off.

It’s important to understand your monthly cashflow and keep your tax plan current. If circumstances have changed for your business, we need to adjust your plan and provisional tax payments accordingly.

Give us a call and we can take a look for you.

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