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Insight, news and updates from Alliott NZ Chartered Accountants, Auckland New Zealand. The views expressed here are the views of the author and should be discussed in further detail should an article be relevant to your individual circumstances.

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Planning for provisional tax

Written by Greg Millar on August 10th, 2015.      0 comments

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

NZD calculatorThe number of instalments you make depends on how you calculate your provisional tax. If you’re GST-registered, how often you file GST returns also affects how many instalments you make.

At the end of the year you pay or are refunded the difference between the amount of provisional tax you paid and the amount you should have paid, based on your actual tax bill for the year.

There are three ways to work out your provisional tax: standard; estimation; and ratio. The option used may depend on other factors:

  1. If you don’t choose an option, we automatically calculate provisional tax using the standard option.
  2. If you choose to estimate your provisional tax, you can’t change to another option for that year.
  3. You can only use the ratio option if you’re registered for GST.

The standard option uses your residual income tax (the amount of tax you have to pay) from the previous year, plus 5%. It’s paid in equal instalments during the year.

You can estimate your provisional tax for the year, based on what you expect your residual income tax to be.

But if your estimate is lower than your actual residual income tax for that year, you’ll be liable for interest on the underpaid amount. You can estimate your provisional tax as many times as necessary up to and including your last instalment date.

The ratio option lets you base your provisional tax payments on a percentage of your GST taxable supplies. Because you’ll work out and pay your provisional tax and GST on the same return, you’ll need to file GST returns monthly or two-monthly and meet other criteria. If you want to use the ratio option you must apply to Inland Revenue in writing or call 0800 377 774 before the start of the tax year when you want to use it.

Use the Provisional tax estimation (IR309) form to estimate or re-estimate your provisional tax. You can complete this form at any time up to the due date for payment of your last instalment of provisional tax. Send the completed form to Inland Revenue by that date.

You can also do your estimation online at www.ird.govt.nz (search keywords: provisional tax estimation).

If you have cash flow difficulties you can consider:

  • making voluntary payments towards your provisional tax (this is not an instalment arrangement and penalties may still apply), and/or
  • re-estimating your provisional tax liability, and/or 
  • using the ratio option (if you’re GST-registered) to calculate your provisional tax, and/or
  • requesting an instalment arrangement for payment of provisional tax. 
At Alliot NZ looking after your tax is not just about helping you to pay less tax – although we do make sure you’re not paying too much. We’re here to help you with any aspect of tax from compliance to complex structures. Call us on 09 520 9200 about planning for provisional tax.

Find out more about provisional tax at www.ird.govt.nz (search keywords: provisional tax). You can also get our Provisional tax (IR289) guide from www.ird.govt.nz (search keyword: IR289). 

Source: Inland Revenue

 

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