Interest is not a penalty — interest is a charge for the use of money. This means we may:
- charge you interest on late or underpaid provisional or end-of-year tax payments
- pay you interest if you overpay your provisional tax.
We’ll work out the interest charges once you’ve filed your income tax return. We will not charge or pay interest if you under or overpay by $100 or less.
There are different rules about interest for provisional tax depending on your situation.
If we charge you interest before your end-of-year tax due date, we'll charge interest until your tax is paid in full.
Interest charges and payments by option
We will not pay you interest if you use AIM and overpay your provisional tax.
We will charge interest if you pay late or underpay your provisional tax. We’ll charge it from the day after the instalment was due.
When you file a Statement of Activity, we’ll charge penalties and interest from the day after the due date for each instalment. When you use 1 of the other options, we do not charge penalties and interest until you file your end-of-year income tax return.
If you use the ratio method and pay on time, we will not charge or pay you interest on your provisional tax.
We will charge interest if you owe more than $100 after your end-of-year tax due date (7 February, or 7 April if you have a tax agent with an extension of time).
We may charge penalties if provisional instalments are paid late or underpaid.
If you use the standard option, the situation is different depending on the amount of residual income tax (RIT) owing.
Residual income tax of under $60,000
If your residual income tax (RIT) is less than $60,000, we'll charge or pay you interest from the day after the end-of-year tax due date.
Before the 2023 income year, we charged interest on any late instalments from the day after the missed (or underpaid) instalment.
Residual income tax of $60,000 or more
If your residual income tax is $60,000 or more, we'll charge or pay you interest from the day after the final instalment date. We pay interest as long as you have made your other provisional tax instalments in full and on time.
We will work out interest on the difference between the provisional tax you have paid and your residual income tax for the year.
For instalments, other than the final instalment, if you pay late, or you underpay, we’ll charge interest from the day after the due date of the instalment you paid late or underpaid. Interest is charged on the smaller of:
- the instalment due minus the amount already paid
- your residual income tax divided by the number of instalments for the tax year, minus the amount already paid.
These rules will not apply if you:
- are associated persons and one of you is a company that has not used the standard or GST ratio option rules
- have entered a provisional tax interest avoidance arrangement
- used the standard method, then switch to the estimate method – you will have interest calculated as if you estimated for the full year.
If you use the estimation method, we will work out interest on the difference between the provisional tax you have paid and your residual income tax (RIT) for the year.
If, based on your residual income tax, you have not paid enough at each instalment, we will charge you interest on the difference, from the day after the provisional instalment date(s). You may be charged even if you paid your estimated provisional tax in full and on time. You may also be charged penalties.
If you have paid too much, we will calculate credit interest at each payment date (or the 1st day of the tax year if you paid earlier).
This higher chance of penalties and interest is why it is important to estimate your residual income tax carefully, and to estimate again if your income increases.
Changing from the standard to estimation option
Mary is a provisional taxpayer. She has a March balance date and was on the standard method for 2025. Mary had an extension of time to file her 2024 return.
She filed after the 1st provisional tax due date. The provisional tax due, based on her 2024 return, was $24,600. Her 2023 RIT was under $5,000, so no provisional tax was due on her first instalment.
Her provisional tax due was:
- Instalment 1 (P1) 28 August 2024 $0.00
- Instalment 2 (P2) 15 January 2025 $12,300
- Instalment 3 (P3) 7 May 2025 $12,300
On 1 December 2024 Mary believes that her profit for 2025 will be lower than her past year and decides to estimate her provisional tax to $15,000. As she estimated after P1, Mary will pay the $15,000 over the next 2 instalments.
As Mary has estimated her provisional tax, debit interest applies from the 1st instalment (P1) onwards (and credit interest applies from the start of the tax year), regardless of when she estimated.
When her 2025 return is filed the residual income tax owing comes to $9,000. We’ll calculate interest over the 3 instalments based on the $9,000.
| Provisional tax instalment |
Paid | Amount interest is calculated on |
Interest calculation basis |
|---|---|---|---|
| 1 | $0.00 | $3,000 | Charge interest on $3,000 from day after P1 until amount is paid ($0.00 - $3,000 = - $3,000 |
| 2 | $7,500 | $3,000 | Pay interest on $1,500 from day after P2 until P3 ($7,500 paid - $6,000 total due = $1,500 |
| 3 | $7,500 | $3,000 | Pay interest on $6,000 from day after P2 until credit is refunded ($15,000 total paid - $9,000 total due = $6,000 |
New provisional tax liability
Generally, you will not have to pay provisional tax if your residual income tax (RIT) last year was $5,000 or less. However, there are 2 situations when you'll have to pay provisional tax for the current year, even if you have not paid it before.
Individual
You're an individual (not including a trustee of a trust) and the following apply:
- your residual income tax was less than $5,000 for the last 4 years
- your residual income tax for the current year is $60,000 or more
- during the current year you've stopped earning income from employment and instead have started earning income from a taxable activity where tax is not deducted at source.
Non-individual
You're a non-individual (including a trustee of a trust) and the following apply:
- you've started to earn income from a taxable activity in the current year
- you did not receive income from a taxable activity in the last 4 years
- for the 2018 year onwards. your residual income tax is $60,000 or more.
When we start calculating interest
If you have to pay provisional tax for the current year, we'll start calculating interest from the day after the 1st provisional instalment date that falls after you began your business (as long as that instalment is more than 30 days after your business start date).