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Te huamoni o te tāke tārewa Interest on provisional tax

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If you pay less provisional tax than your residual income tax for that year, we may charge you interest. You may have to pay interest even if you:

  • paid your instalments in full and on time
  • didn't have to pay provisional tax.

We'll work out the interest charges once your income tax return has been filed. We will not charge interest if you over or underpaid by $100 or less.

We may pay interest to you if you paid more provisional tax than you needed to.

When interest starts

Interest on provisional tax is calculated from the day after your first provisional tax instalment date if:

  • you use the estimation option and your residual income tax (the final tax you have to pay at the end of the year) is more than $2,500
  • your residual income tax is $60,000 or more and you’re an initial provisional taxpayer for that income year.

If you use the accounting income method

Credit interest is not applied to overpayments of provisional tax, but debit interest applies to underpayments from the day after the due date for the instalment.

If you use the ratio option

You won't pay or receive interest on your provisional tax instalments. 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). If instalments are paid late or not paid in full then penalties may apply.

If you use the standard option

Credit and debit interest starts from the day after the end-of-year tax due date if:

  • you have made your payments in full and on time
  • your residual income tax is less than $60,000.

Credit and debit interest starts from the day after the final instalment date if:

  • you have made your payments in full and on time
  • your residual income tax is $60,000 or more.

Interest is calculated on the difference between the provisional tax you have paid and the residual income tax.

If you’ve paid all but your final instalment on time, interest will apply from the final instalment due date. Interest will also apply from the final instalment due date if you change to the estimation option on or before that date.

If you pay an instalment late, or if you do not pay an instalment at all, interest is charged from the day after the instalment due date. Interest is charged on the smaller of:

  • the instalment minus the amount paid, or
  • your residual income tax divided by the number of instalments for the tax year less the amount paid.

The above rules may not apply if you are associated to specific persons or entities and one of you:

  • is a company that is not covered by the above standard option rules
  • uses the GST ratio option, or
  • has entered a provisional tax interest avoidance arrangement.

If your residual income tax is $2,500 or less, you may be able to elect to become a provisional tax payer to receive credit interest on any provisional tax payments made.

New provisional taxpayers

Special rules apply for new provisional taxpayers who have started a taxable activity during the year. 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 is more than $2,500
  • your residual income tax is $60,000 or more and you’re an initial provisional taxpayer for that particular income year.

When use of money interest applies from if you use the standard method (and required payments were made in full and on time)

Provisional tax amount more than residual income tax

If end-of-year residual income tax is ... then credit use of money interest is calculated ... from the ...
less than $60,000 on the difference between the provisional tax amount paid and the residual income tax terminal tax due date.
$60,000 or more on the difference between the provisional tax amount paid and the residual income tax last instalment date.

Provisional tax amount less than residual income tax

If end-of-year residual income tax is ... then debit use of money interest is calculated ... from the ...
less than $60,000 on the difference between the provisional tax amount paid and the residual income tax terminal tax due date.
$60,000 or more on the difference between the provisional tax amount paid and the residual income tax last instalment date.

Check your tax return guide or our Provisional tax (IR289) booklet for more information.

Note that the interest rules do not override provisional tax rules, such as the dates from when interest applies or how we decide who is a provisional tax payer.