We’ve built this article around the questions we frequently get from new business owners. Scroll down, or feel free to jump straight to the one on your mind!

What is provisional tax?

The moment it’s anticipated that you’ll pay more than $5,000 in tax per year, you enter the IRD’s provisional tax regime.

Provisional tax is a method in which you pay your current year’s tax as you go.

It’s designed to help businesses ease cash flow by prepaying smaller amounts throughout the year instead of a giant lump-sum.

Why do I need to prepay my tax?

Back when you were a “normal” employee, your employer took responsibility for sending your tax to the IRD every pay period. It’s what we call Pay As You Earn (PAYE) tax.

When you’re instead receiving profits from your business, there are two drawbacks to you simply paying the full amount of tax at the end of the financial year:

• The IRD doesn’t get paid for a full year
• Because you need to come up with a lot of tax in April, it sneaks up on you

Provisional tax is the government’s answer. You don’t need to pay tax every month, and you don’t need to come up with a lump sum in April. Instead, you pay your tax in two or three instalments, along with a “wash-up” in April (called terminal tax, which we’ll cover later on).

Provisional Tax Methods

Standard

The amount you pay in tax is based on what you’ve paid previously, along with a small increase. It’s the most common and recommended method, as all calculations are handled by the IRD.

Estimated

You estimate your tax for the year and make payments accordingly. If your estimate is incorrect, the IRD may well charge you interest and short-fall penalties.

Other

We haven’t included information about the AIM or ratio methods, but feel free to browse information from Inland Revenue!

How is Provisional Tax Calculated?

Standard method

The IRD estimates provisional tax based on the most recent tax return filed. Let’s take the 2021 tax year as an example:

Once the 2025 provisional tax amount is known, it needs to be paid in three equal instalments:

• August 2020
• January 2021
• May 2021
• Then the wash-up (terminal tax) is due April 2022

The main benefit of this method is that if you make these payments in full and on time, and your tax bill is under $60,000, the IRD will not charge interest or penalties.

Estimation method

You advise Inland Revenue of your expected tax charge for the year. This is usually estimated by you based on profit and income expectations. This estimation is paid in three equal instalments and a wash-up, as with the Standard method.

If your actual tax bill turns out to be higher than your estimate, the IRD is likely to charge interest and penalties. For this reason, we prefer the Standard method.

Major Pitfall of First Year Provisional Taxpayers

If 2024 is the first year you were operating (year ended 31 March 2024), you haven’t paid tax for a while. Suddenly you have to pay for 2024 and prepay 2025 – all within ten months.  

Assuming you have a March year-end and you don’t file GST returns every six months, let’s see what your first year in business will look like:

From business start date to July 2021 – no tax paid   

August 2021 – first prepayment of 2022 (P1)       

January 2022 – second prepayment of 2022 (P2)       

April 2022 – all your tax for the 2021 year in one lump sum       

May 2022 – third prepayment of 2022 (P3)   

At Traktion, we can provide you with the expected amounts and the due dates. The trick is to get your financial information into us as quickly as possible so you have plenty of time to plan for tax payments.

What is Terminal Tax?

It’s the final payment you make at the end of a tax year, after any provisionalyour provisional payments. 

Your income tax is based on your income, which could include wages, rental income, business profit, shareholder salary, interest, and dividends.

If you’re only earning income from wages and interest, you probably don’t need to file a personal tax return. The IRD will work it out for you and send a bill if necessary.

After tax has been calculated on your income, it can be reduced through:

• Tax already paid by others on your behalf – wages, schedular payments, interest, and dividends
• Donation rebates
• Provisional tax paid during the year
• Independent Earner Tax Credit

Once all of these are deducted, we arrive at your terminal tax.

When is Income Tax Due?

Provisional tax

This depends on what method you use to calculate provisional tax, your balance date, and whether you are GST registered.

If you have a year-end date of 31 March and aren’t on a six-monthly GST basis

• 28 August 
• 15 January 
• 7 May

If you are on a six-monthly GST basis

• 28 October
• 7 May

For those who have an Extension of Time (EOT), the final tax payment is due in April the following year.

If you don’t have an EOT, terminal tax is due in July the same year.

If you’re a Beany client, you’ll see upcoming payments on your Beany page, so you don’t need to memorise those dates![/vc_column][/vc_row]