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Understanding provisional tax

Provisional tax helps you manage your income tax by paying it in instalments during the year instead of paying a big amount at the end of the year. Here you'll learn the basics of provisional tax, including what it is and who has to pay it.

Provisional tax basics

If you had more than $2,500 of tax to pay at the end of the year from your last income tax return, you'll have to pay provisional tax the following year. This usually happens when you earn income without having tax deducted during the year.

Anyone who pays income tax may need to pay provisional tax including individuals, companies and trusts. Provisional taxpayers often earn:

  • self-employed income
  • rental income
  • income earned as a contractor
  • income from a partnership
  • overseas income.

Tax to pay at the end of the year is called residual income tax (RIT).  Residual income tax is the amount of income tax you pay for the year, less any PAYE and other tax credits you may be entitled to, except for Working for Families Tax Credits.

Meeting your provisional tax obligations

It's easier to meet your provisional tax obligations if you:

  • Calculate your provisional tax
    Use either the standard, estimation or ratio option to calculate your provisional tax. It's important to accurately calculate how much you need to pay to avoid penalties or interest.
  • Know your payment dates
    Pay provisional tax on fixed dates during the year. Your payment dates will depend on your balance date (when your tax year ends), whether you're GST registered and what calculation option you choose. Make sure you pay on time to avoid late payment penalties or interest.
  • Budget for provisional tax
    Keep track of how much you need to pay and when. Set money aside so you'll be ready to pay when the due date arrives.