Should I be paying provisional tax?

Do you understand Provisional Tax, do you know when you need to pay and why you need to pay?

Monteck Carter’s expert, Glynis Carter answers these questions for you.

Provisional Tax is a way to pay personal and business income tax where you have not paid in full through the PAYE or Withholding Tax system. This only affects taxpayers that have more than $2,500 to pay in any one year.

How do I work out how much Provisional Tax to pay?

There are two calculation methods:

Standard Option – takes your previous year’s income and adjusts it – if you are still working on 2013 tax they will add 5% on to your residual tax amount from the year before and that will be the residual tax they will apply as Provisional Tax.

The Standard is the default option, if you like, meaning that if you don’t opt for an option that is the one the IRD will apply.

Estimation Option – This is the alternative usually only done with company tax unless your personal situation means your personal tax has decreased.  You can estimate what your residual income tax will be.  BUT you need to make sure you are doing it right otherwise you may not pay enough Provisional Tax and attract Use of Money Interest and that could cost you more.

When to pay?

28 August 2015, 15 January 2016 and 7th May 2016 are the payment dates for provisional tax for the tax year 2015/2016 and the are aligned with GST payment dates for those months as well. So three times a year you will be paying more than GST on those dates.

What other Options are there?

This only relates to company provisional tax, not personal. If you are GST registered, you can also use the Ratio Method.

With this method you have to pay Provisional Tax along with your GST payments. This is available as a means of aligning your payments with business cash flow and is based on a percentage of your GST taxable supplies.

This is not as straightforward as you may think and it’s best to ask an accountant to help with this one.  There are conditions for using the Ratio Method:

  • you have to have been in business for two whole tax years,
  • residual income tax has to be between $2500 and up to $150,000,
  • plus you can’t be in a partnership,
  • you have to be on 2 monthly GST payments.

What if my income is not as much as I thought and I’ve paid too much Provisional Tax?

You will get a refund or you can transfer it to the next payment – you need to check with the IRD and ask.

Whatever you choose to do, you would be well advised to seek some professional guidance to make sure you are doing the right thing for you and your business with Provisional Tax payments. Accountants have systems set up to help with calculating and paying Provisional Tax.  It will cost you less in the long run to get it right!

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