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Provisional Tax

 
IRD - 20 January 2012 (updated 4 September 2013)

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 you had income tax of more than $2,500 to pay at the end of any tax year you may have to pay provisional tax for the following year.

Residual income tax (RIT) is the amount of tax you have to pay, less any tax credits you may be entitled to (excluding working for families tax credits or other tax payments made during the year) and any PAYE deducted.

You can use one of three options for working out your provisional tax: standard, estimation, and ratio.

Standard option

This is the default option the IRD will use unless you choose the estimation or ratio options.

Under this option, your provisional tax payable is your previous year's residual income tax plus 5%, although this can vary when there are changes in income tax rates. Further information is available here.

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, then subtract any tax credits (such as PAYE or RWT)
  • 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

Ratio option

To use the ratio option, you must be GST registered.

Under the ratio option, you pay provisional tax based on your GST taxable supplies for each two-month period. You'll make six provisional tax payments of differing amounts depending on your taxable supplies during each two-month period.

The IRD calculate your ratio percentage and you multiply this by your previous two months GST taxable supplies to get the amount of provisional tax you need to pay.

Under the ratio option, you'll pay provisional tax six times during the year - the amount you pay varies depending on your GST taxable supplies.
You must apply to use the ratio option before the start of the tax year you want to use it in. You can do this in writing or by calling the IRD.

For more information and an example using the ratio option, there is a brochure available here: A new way to calculate your provisional tax (IR851).

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:

  • 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.

For futher information on provisional tax, due dates and changes made by IRD refer to the IRD Website.

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All information is correct at the date of article publication. Please note we provide the information as a service only. Accordingly, the contents are not intended as a substitute for specific professional advice and should not be relied upon for that purpose.   


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