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Business income tax
Te take whiwhinga pakihi
Paying tax: Provisional tax

Provisional tax basic information

Provisional tax is a way of managing your income tax by paying compulsory instalments during the year.

Meeting your income tax obligations during the tax year

  • The number of instalments you are required to make depends on the way you choose to calculate your provisional tax instalments. If you're GST-registered, how often you file GST returns also determines how many provisional tax instalments you're required to make.
  • The amount of provisional tax you need to pay is based on your expected profit for the year or your GST taxable supplies (sales) and depends on the way you choose to work out your provisional tax instalments.
  • 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 profit for the year.

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You may be liable for provisional tax

If your residual income tax (tax to pay) on your last income tax return is more than $2,500, you may have to pay provisional tax for the following year.

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What residual income tax is

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.

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Calculating your provisional tax

You can use one of these options to work out your provisional tax:

  • standard
  • estimation
  • ratio option.

The ratio option can only be used if you're registered for GST.

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Due dates for your provisional tax

The number of times you need to pay provisional tax each year depends on the option you use to calculate your provisional tax, and how many times you pay GST (if registered).

If you have a 31 March balance date (ie your tax year ends on 31 March) and you use the standard or estimation options to calculate your provisional tax payments, your provisional tax due dates are:

  If you're not registered for GST If you're registered for GST and pay monthly or two-monthly If you're registered for GST and pay every six months
First instalment 28 August 28 August 28 October
Second instalment 15 January 15 January 7 May
Third instalment 7 May 7 May  

If you have a 31 March balance date and you use the ratio option to calculate your provisional tax payments, these are due on:

First instalment 28 June
Second instalment 28 August
Third instalment 28 October
Fourth instalment 15 January
Fifth instalment 28 February
Sixth instalment 7 May

If you're registered for GST you pay your provisional tax and GST at the same time on a combined GST and provisional tax return.

If you have another balance date (ie your tax year ends before or after 31 March) you can work out your due dates with our Tax due date calculator. You can find it under "Work it out".

Make sure we receive your returns and payments on or before the due date. If you file and/or pay late or don't pay the full amount, late payment penalties and interest may apply.

For more information, see our Provisional tax guide (IR289).

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Reduction in tax rates

Changes in individual tax rates for the 2011 and 2012 income years affect how you calculate your provisional tax instalments. Because the income tax rates are lower, the provisional tax instalments may work out to be less than in previous years.
To calculate instalments payable on or after 1 October 2010 (for the 2011 income year) and for all instalments in the 2012 income year:

  • Take your RIT from your last income tax return less 5%.

If the result of this calculation is less than $2,500, then you will not be required to make any provisional tax payments for that income year, as you’ll be below the required threshold.

After the 2012 income year, the formula will gradually change back to normal, becoming standard in the 2014 income year.

See the table below for details:

Year for provisional tax
being calculated
Year of RIT amount used Adjustment
2011 2009 RIT x 95%
2010 RIT x 95%
2012 2010 RIT x 95%
2011 RIT x 95%
2013 2011 RIT (no adjustment)
2012 RIT + 5%
2014 2012 (back to original calculation) RIT + 10%
2013 (back to original calculation) RIT + 5%


Example 1 (standard option)

During the 2010 income tax year (ie, the year ending 31 March 2010), Jenny's self-employment business:

made a profit of $25,000
was liable for residual income tax $4,060

As Jenny's RIT is more than $2,500, she may have to pay provisional income tax in her next income year (2011). Using the standard option, she would have calculated her provisional tax like this:

RIT $4,060
add 5% to allow for inflation $203
Provisional tax for 2011 income year $4,263

With the changes to the tax rates from 1 October 2010 her provisional tax for the 2011 income year would be calculated as follows:

RIT x 95% ($4,060 x 95%) $3,857
Provisional tax for 2011 $3,857

Jenny must pay provisional tax for the 2011 income year in three instalments as follows:

  • 1st instalment (before 1 October) $1,421 ($4,060 + 5% / 3)
  • 2nd instalment (after 1 October) $1,150.33 ($4,060 x 95% / 3 x 2 – 1st instalment)
  • 3rd instalment $1,285.67 ($4,060 x 95% - 1st & 2nd instalments)

Jenny's balance date is 31 March, so her due dates are:

  • 28 August 2010
  • 15 January 2011
  • 7 May 2011.


Example 2 (standard option)

During the 2011 income year, George's self-employed business:

made a profit of $18,800.00
was liable for RIT $  2,534.00

Using the standard option, he would have calculated his provisional tax like this:

RIT $2,534.00
add 5% to allow for inflation $ 126.70
Provisional tax for 2011-12 $2,660.70

With the changes to the tax rates from 1 October 2010, his provisional tax for the 2012 income year would be calculated as follows:

RIT x 95% ($2,534 x 95%) $2,407.30
Provisional tax for 2011-12 $2,407.30

As this is less than $2,500, George would not be liable for provisional tax for the 2012 income year.  If he expects that his RIT for the 2012 income year will exceed $2,500 he may make voluntary payments if he wishes to. See "Voluntary payments of provisional tax" below.

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Ratio option

Individuals

There have been changes in the rates of personal income tax for the 2011 and 2012 income years. The change in tax rates affects how your ratio percentage is calculated as follows:

Year RIT previous year RIT year before proceeding RIT two years previous
2011 (2010 RIT - 10%)
(2010 taxable supplies - asset adjustments) x 100
(2009 RIT - 15%)
(2009 taxable supplies - asset adjustments) x 100
(2008 RIT - 20%)
(2008 taxable supplies - asset adjustments) x 100
2012 (2011 RIT - 10%)
(2011 taxable supplies - asset adjustments) x 100
(2010 RIT - 15%)
(2010 taxable supplies - asset adjustments) x 100
(2009 RIT - 20%)
(2009 taxable supplies - asset adjustments) x 100
2013 (2012 RIT (original formula))
(2012 taxable supplies - asset adjustments) x 100
(2011 RIT - 10%)
(2011 taxable supplies - asset adjustments) x 100
(2010 RIT - 15%)
(2010 taxable supplies - asset adjustments) x 100
2014 (2013 RIT (original formula))
(2013 taxable supplies - asset adjustments) x 100
(2012 RIT (original formula))
(2012 taxable supplies - asset adjustments) x 100
(2011 RIT  - 10%)
(2011 taxable supplies - asset adjustments) x 100

From the 2015 income year provisional tax assessments return to the standard rules.

Companies

If your business's income is taxed at the company rate the ratio percentage is calculated as follows: 

Year RIT previous year RIT year before proceeding RIT two years before proceeding
2012 (2011 RIT - 5%)
(2011 taxable supplies - asset adjustments) x 100
(2010 RIT - 5%)
(2010 taxable supplies - asset adjustments) x 100
(2009 RIT - 5%)
(2009 taxable supplies - asset adjustments) x 100
2013 (2012 RIT)
(2012 taxable supplies - asset adjustments) x 100
(2011 RIT - 5%)
(2011 taxable supplies - asset adjustments) x 100
(2010 RIT - 5%)
(2010 taxable supplies - asset adjustments) x 100
2014 (2013 RIT)
(2013 taxable supplies - asset adjustments) x 100
(2012 RIT)
(2012 taxable supplies - asset adjustments) x 100
(2011 RIT  - 5%)
(2011 taxable supplies - asset adjustments) x 100

From the 2015 income year provisional tax assessments return to the standard rules.

Example (individual using ratio option)

Carl has been in business and registered for GST for the last three years. During the 2009-10 income tax year, Carl's business:

made a profit of $60,000
was liable for RIT $14,240

As Carl's RIT is more than $2,500, he may be assessed for provisional income tax in his next tax year. Carl meets all of the criteria to use the ratio option to calculate his provisional tax payments, and applies to us to use this before his 2010 income year starts.

We calculate Carl's ratio percentage as 5 %. This is calculated as follows:

(2010 RIT)
(2010 taxable supplies - asset adjustments) x 100

Carl's balance date is 31 March. Using the ratio option, Carl needs to make six provisional tax instalments each year.

In April and May 2010 (the first two months into Carl's 2011 income tax year), Carl's GST taxable supplies (sales) were $15,000. His first provisional tax payment for the 2011 income tax year is due 28 June 2010. It's calculated as follows:

GST taxable supplies $15,000
multiply by ratio percentage 5%
Provisional tax payment $750

Similarly, if Carl's GST taxable supplies for the remaining months are:

June and July 2010 $25,000
August and September 2010 $42,000
October and November 2010 $35,000
December 2009 and January 2011 $45,000
February and March 2011 $48,000

With the changes to the tax rates from 1 October 2010, Carl’s provisional tax for the 2011 income year would be calculated as follows:

(2010 RIT - 10%)
(2010 taxable supplies - asset adjustments) x 100

This means Carl’s ratio percentage has changed from 5% to 4% effective from 1 October 2010.  Multiplying these by Carl's ratio percentage of 5% (before 1 October 2010) and 4% (after 1 October 2010), his provisional tax payments are:

Payment due 28 August 2010 $1,250
Payment due 28 October 2010 $1,680
Payment due 15 January 2011 $1,400
Payment due 28 February 2011 $1,800
Payment due 7 May 2011 $1,920

Carl's provisional tax payments vary depending on his taxable supplies during the year, which helps with his cash flow.

To work out your due dates when your balance date isn't 31 March, use our Tax due date calculator. You can find it under "Work it out".

Please note that we will work out your ratio percentage and advise you of this.

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How you can budget for provisional tax

Like all other business expenses, you have to budget ahead for your taxes, so it is important to know:

  • when your provisional tax payments are due
  • how much they will be.

It's a good idea to use a separate bank account to put aside money to cover your provisional tax payments.

If you have difficulty paying your provisional tax, please find out about your options in our Managing financial difficulty and debt section.

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You can make voluntary provisional tax payments

You may find it useful to make voluntary provisional tax payments. This will help to reduce the amount of income tax you have left to pay at the end of the tax year.

You can make voluntary repayments at any time. If this is before a provisional tax instalment due date, you can reduce the amount of provisional tax due by the amount of the voluntary payment.

For example, if you make a $400 voluntary payment before your provisional tax instalment is due and you calculate the amount as $1,000, you only need to pay the remaining $600 by the instalment due date.

If you're also registered for GST, you can make voluntary payments using your GST and provisional tax return (GST103).

For more information on how to make a payment to Inland Revenue, please see our Making payments section.

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Provisional tax in your first year

In your first year of business you should budget and put money aside for your provisional tax. This will help ease the cash flow in your second year of business, when you'll need to pay provisional tax instalments for that year plus the tax for your first year of business. One way to spread the cost of your first year's tax is to make voluntary payments to us during your first year.

Example

Sandra started business as an electrician on 31 May 2009.

  • Her first business income tax return is for the year ended 31 March 2010 (ie her 2010 income year) and this is due on 7 July 2010. This income tax return shows RIT of $4,000, which is due for payment on 7 February 2011.
  • As her RIT is over $2,500 she will be assessed for provisional tax during her 2011 tax year.
  • From 1 October 2010 using the standard option, Sandra's 2011 provisional tax is $3,800 (last year's RIT less 5%). This is due in three instalments during the year.
  • Sandra's payments are due:

  • 28 August 2010 (her first provisional tax instalment for the 2011 income year) $1,400
    15 January 2011 (her second provisional tax instalment for the 2011 income year) $500
    7 February 2011 (her RIT for the 2010 income year which is her first year in business) $4,000
    7 May 2011 (her third provisional tax instalment for the 2011 income year) $1,900
    Total $7,800

  • From 31 May 2009 to 27 August 2010, (the due date for her first provisional instalment is 28 August 2010), Sandra had no taxes to pay. She now needs to budget for her provisional tax payments during her second year in business and for the RIT payable for her 2010 income year of $4,000 due on 7 February 2011.
  • Provisional tax paid is deducted from the following year's RIT which helps to manage her income tax. The balance will either be tax to pay or a refund due.

Note: Non-individuals and individuals with RIT over $50,000 may be liable for interest even if they have no provisional tax liability in their first year. Find out how interest is calculated for more details.

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You may be charged interest

In some circumstances you may be charged interest if the provisional tax you paid is less than your RIT. If the provisional tax you pay is more than your RIT, we may pay you interest on the difference.

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Tax pooling and provisional tax intermediaries' contact details

Tax pooling lets customers to pool their provisional tax payments. This enables them to offset any provisional tax underpayments by any overpayments they've made within the same pool. This reduces their exposure to use-of-money interest. The pooling arrangement is made through a commercial intermediary, who arranges for participating customers to be charged or compensated for the offset.

For more information about tax pooling contact your tax agent or a provisional tax intermediary - see below. Please note that we do not endorse any one intermediary over any other.

Bailey Ingham
18 Maniapoto Street
PO Box 225
Otorohanga
Business Phone: +07 873 7325
Email: bailey.ingham@xtra.co.nz

Electronic Tax Exchange Ltd (ETX)
PO Box 105 194
Auckland 1143
Phone: 0800 389 829 or 64 9 972 9560
Fax: 64 9 972 9574
Email: contact@etx.co.nz
Website: www.etx.co.nz

Provisional Tax Finance Ltd
PO Box 113 068, Broadway
Newmarket
Auckland
Phone: 64 9 950 3516 or 64 9 950 3515
Fax: 64 9 523 9763
Email: contact@taxfinance.co.nz
Website: www.taxfinance.co.nz

Tax Management New Zealand Ltd (TMNZ - since 2003)
PO Box 105 435
Auckland 1143
Phone: 64 9 575 9105
Free Phone: 0800 829 888
Email: admin@tmnz.co.nz
Website: www.tmnz.co.nz

Tax Pooling Solutions Ltd (TPS)
PO Box 37 830
Parnell
Auckland 1151
Phone: 64 9 948 8833
Email: enquiries@taxpooling.co.nz
Website: www.taxpooling.co.nz/

The New Zealand Tax trading Company Limited
PO Box 74479
Greenlane
Auckland 1546
Phone: 64 9 625 5501
Email: enquiries@taxtrading.co.nz
Website: www.taxtrading.co.nz

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Date published: 12 Nov 2013

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