Provisional tax: Provisional tax basic information
Provisional tax basic information
Meeting your income tax obligations during the tax year
Provisional tax is a way of managing your income tax by paying compulsory instalments during the 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.
Are you 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.
What is residual income tax?
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 deductions.
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.
Due dates
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). Go to "Forms and guides".
Reduction in tax rates
There has been a change in the rates of personal income tax from the 2009 tax year. The change in tax rates affects how you calculate your provisional tax instalments. The standard option of calculating provisional tax for the 2009 year is the residual income tax (RIT) for the immediately preceding income year minus $730.00 + 5%
See the table below for details:
| Year for provisional tax being calculated |
Year of RIT amount used | Adjustment |
|---|---|---|
|
2009 |
2007 |
RIT - $730 + 10% |
|
2008 |
RIT - $730 + 5% | |
|
2010 |
2008 |
RIT - $1460 + 10% |
|
2009 |
RIT - $730 + 5% | |
|
2011 |
2009 |
RIT - $1327.50 + 10% |
|
2010 |
RIT - $597.50 + 5% | |
|
2012 |
2010 |
RIT - $1410 + 10% |
|
2011 |
RIT - $812.50 + 5% | |
|
2013 |
2011 |
RIT - $812.50 + 10% |
|
2012 (back to original calculation) |
RIT + 5% |
| Example 1 (standard option) | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
During the 2008-09 income tax year (ie, the year ending 31 March 2009), Jenny's self-employment business:
As Jenny's RIT is more than $2,500, she may have to pay provisional income tax in her next tax year (2010). Using the standard option, she calculates her provisional tax like this:
With the changes to the tax rates in 2009 her provisional tax for the 2010 year would be calculated as follows:
Jenny must pay provisional tax for 2009-10 in three instalments of $906. Jenny's balance date is 31 march, so her due dates are:
| |||||||||||||||||
| Example 2 (standard option) | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
During the 2008-09 tax year, George's self-employed business:
Using the standard option, he calculates his provisional tax like this:
With the changes to the tax rates in 2009 his provisional tax for the next year would be calculated as follows:
As this is less than $2,500 George would not be liable for provisional tax for 2010 tax year. If he expects that his RIT for the 2010 year will exceed $2,500 he may make voluntary payments if he wishes to. See "Voluntary payments of provisional tax" below. | |||||||||||||||||
Ratio option
Individuals
There has been a change in the rates of personal income tax from the 2009 tax year. The change in tax rates affects how your ratio percentage is calculated as follows:
| Year | RIT previous year | RIT two years previous |
|---|---|---|
| 2009 | (2008 RIT - $730) (2008 taxable supplies - asset adjustments) x 100 |
(2007 RIT - $730) (2007 taxable supplies - asset adjustments) x 100 |
| 2010 | (2009 RIT - $730) (2009 taxable supplies - asset adjustments) x 100 |
(2008 RIT - $1,460) (2008 taxable supplies - asset adjustments) x 100 |
| 2011 | (2010 RIT - $597.50) (2010 taxable supplies - asset adjustments) x 100 |
(2009 RIT - $1,327.50) (2009 taxable supplies - asset adjustments) x 100 |
| 2012 | (2011 RIT - $812.50) (2011 taxable supplies - asset adjustments) x 100 |
(2010 RIT - $1,410) (2010 taxable supplies - asset adjustments) x 100 |
| 2013 | (2012 RIT (original formula)) (2012 taxable supplies - asset adjustments) x 100 |
(2011 RIT - $812.50) (2011 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 |
Companies
If your business's income is taxed at the company rate the ratio percentage is calculated as follows:
| Year | RIT previous year |
|---|---|
| 2009 | 2008 RIT x 90 (2008 taxable supplies - asset adjustments) |
| 2010 | 2009 RIT (2009 taxable supplies - asset adjustments) |
| 2011 | 2010 RIT (2010 taxable supplies - asset adjustments) |
| Example (individual using ratio option) | |||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Carl has been in business and registered for GST for the last three years. During the 2008-09 income tax year, Carl's business:
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 2009-10 tax year starts. We calculate Carl's ratio percentage as 5 %.This is calculated as follows: (2009 RIT - $730) 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 2009 (the first two months into Carl's 2009-10 income tax year), Carl's GST taxable supplies (sales) were $15,000. His first provisional tax payment for the 2009-10 income tax year is due 28 June 2009. It's calculated as follows:
Similarly, if Carl's GST taxable supplies for the remaining months are:
Multiplying these by Carl's ratio percentage of 5%, his provisional tax payments are:
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.
Budgeting 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.
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.
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 2008.
| |||||||||||
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.
Tax pooling
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.
Electronic Tax Exchange Ltd (ETX)
Level 12, Brookfields House, 19 Victoria Street West
PO Box 155 042, Wellesley Street
Auckland 1141
Phone: 64 9 357 0636
Mobile: 64 21 887 815
Email: support@etx.co.nz
Website: www.etx.co.nz
Tax Management New Zealand Ltd (TMNZ)
PO Box 25 050
Auckland
Phone: 64 9 575 9105
Fax: 64 9 575 9115
Email: admin@taxmanagement.co.nz
Website: www.taxmanagement.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
Date published: 10 Oct 2008
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