Chief executive of Tax Management NZ
Difficult to get right, expensive to get wrong – that’s how many business owners describe paying provisional tax.
However, that statement no longer rings true.
New rules mean you don’t have to constantly estimate your liability throughout the year anymore.
Inland Revenue (IRD) will no longer hit you with interest if you pay your provisional tax based on a five percent uplift of last year’s liability (this is known as the standard method).
Many will pay their first instalment of provisional tax under the new rules on August 28.
Now before you get your celebratory dance on, this is tax. The devil is always in the detail. So here’s an easy to digest summary of how provisional tax now works.
The biggest change applies to smaller taxpayers using what IRD calls the ‘safe harbour’.
If your actual income tax liability is less than $60,000; and
If you paid the amounts of tax required as per the standard method at your three provisional tax dates for that year.
Then you will not be charged IRD interest if you did not pay enough provisional tax, provided any final balance is paid by your terminal tax date.
Then this is a significant win for small businesses (and trusts). Previously, the safe harbour threshold was $50,000 and applied to individuals only.
The second change affects medium and larger businesses.
If your actual income tax liability is $60,000 or more; and
If you paid provisional tax for that year based on the standard method.
Then you will not be charged IRD interest if you paid the amounts of tax due as per the standard method at your first and second provisional tax dates for that year, even if your actual liability is higher
Then the final balance will be due at your third provisional tax date. IRD interest applies on any underpayment of tax from this date.
Capping the liability at the first and second instalments provides certainty, particularly if you have unpredictable or seasonal income. Having the final balance due at the third provisional tax instalment is sensible, as you should have a good estimation of your actual liability.
Still, prescribed payment dates will continue to pose problems from a cashflow perspective if you cannot pay provisional tax on time.
Using an IRD-approved tax pooling intermediary can provide flexibility by letting you choose when and how you want to pay, without incurring IRD interest and late payment penalties.