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Understanding provisional tax

On this page you will learn the basics of provisional tax, including what it is and who has to pay it.

Provisional tax helps you manage your income tax by paying it in instalments during the year. It lets you "spread the load" and avoid having a big amount to pay at the end of the year.

If you had more than $2,500 of tax to pay (called residual income tax) from your last income tax return, you will 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.

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Provisional tax basics

To help you understand provisional tax, a term we frequently use is residual income tax (RIT). This is the amount of income tax to pay for the year, less any PAYE and other tax credits you may be entitled to (except Working for Families Tax Credits).

You'll be able to meet your provisional tax obligations if you can:

  • 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.
Example: Andy is a provisional taxpayer

Andy earns a salary and some self-employed income.

He files his 2016 income tax return:

Salary $78,000
Self-employed income $17,800
Taxable income $95,800
   
Tax on taxable income $22,534
PAYE deducted from his salary $16,660
   
Residual income tax $5,874

Because Andy's residual income tax is more than $2,500 he'll need to pay provisional tax for 2017.

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