Interest: Taxes and refunds
How interest is calculated
Interest on provisional tax
Individuals
For individuals, interest is generally calculated from the date after your first provisional tax instalment date if:
- you use the estimation option and your residual income tax (RIT) is $2,500 or more
- your RIT is over $50,000 (for tax years 2010 and beyond) - whether or not you believed you were a provisional taxpayer for that particular income year. For income years prior to 2010, interest is generally calculated from the date after your first provisional tax instalment date if your RIT is over $35,000
- you hold a Certificate of exemption from resident withholding tax (IR15C) and your RIT was more than $2,500.
Non-individuals
If your RIT is $2,500 or more, interest is calculated from the day after your first instalment date.
If your RIT is less than $2,500, you may be able to elect to become a provisional tax payer to receive credit interest on any provisional tax payments made. However, if you do elect, you could be subject to debit interest on any underpaid provisional tax instalments.
There are special rules that determine when interest starts for new provisional tax payers who have started a taxable activity during the year.
Please see your tax return guide or our Provisional tax (IR289) booklet for more information.
Interest on GST refunds
Interest starts on the later of:
- the day after:
- the 15th working day after we receive your GST return, or
- the original due date for payment, whichever comes first
- the day after the return is received
- the day after the payment that generates the refund is made.
Amounts of $100 or less
Interest is not charged or paid on amounts of $100 or less of underpaid or overpaid tax.
How payments are applied
If you are late paying your tax, or you do not pay the full amount, any payments you make will first be used to clear your unpaid interest, and then be used against your unpaid tax. The exception to this rule is for payments of provisional tax, where payments are used for provisional tax instalments as specified by the taxpayer.
Credit interest may also be used to pay other unpaid taxes.
Interest as gross income
Interest paid on overpayments of tax is considered gross income and is assessable in the income year in which it is refunded to you. This also applies if you have credited the amount of interest towards paying other unpaid tax.
If a reassessment of a return shows that you have overpaid your tax, you will be paid interest on the amount that was overpaid. The interest paid to you as a result of this is assessable in the income year following the year of reassessment.
| Example | |
|---|---|
| Maria's 2007 tax return is reassessed on 12 February 2008, and shows that she has overpaid tax, so Maria is paid interest on the amount she overpaid. This interest is assessable as gross income in Maria's 2009 income year. | |
Tax-deductible interest
Interest paid on underpayments of tax is deductible for business purposes in the income year in which it is charged.
If a reassessment of a return shows you owe more tax, the interest you pay on the underpayment is deductible in the income year following the year of reassessment.
| Example | |
|---|---|
| Trevor's 2007 tax return is reassessed on 7 December 2008 and shows that Trevor did not pay enough tax. Trevor is charged interest on the amount he owes. This interest is deductible in Trevor's 2009 income year. | |
Interest on tax in dispute
When you challenge an assessment or disputable decision, you may defer payment of the tax in dispute while the dispute is being resolved.
If you are successful in the dispute, we will refund any tax in dispute that you paid and pay you interest on it.
If we are successful, you will be charged interest on any unpaid portion of outstanding tax.
Remission or cancellation of interest
Remission
Interest can be remitted (legally forgiven) in limited circumstances, for example where we have given you incorrect advice and that advice has directly resulted in the non-compliance. Remission also occurs when interest is correctly imposed, but a decision is made to relieve you of the liability to pay.
You must apply for remission in writing and you must provide evidence to support the fact that incorrect advice was given.
This is not the only situation in which remission of interest may be granted. Each case is considered individually.
Cancellation (grace period)
Taxpayers are given a grace period (usually 30 days) to pay a balance shown on a notice of assessment or a statement of account. If the balance is paid in full within this period, the interest incurred during this time is automatically cancelled.
Summary
- The interest rules are generic across all taxes and duties.
- Interest is paid on overpayments and charged on underpayments.
- Interest is generally payable from the original date that the tax is due.
- Interest rates are determined on a market basis to encourage on-time payments.
- Interest paid to you is considered gross income (ie income to be returned in your income tax return), so it is subject to resident withholding tax and non-resident withholding tax.
- The interest you pay is deductible if you are in business.
| Note | |
|---|---|
| Provisional tax payers The interest rules do not override specific provisional tax rules such as:
|
|
Date published: 31 Mar 2009
Back to top
