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Provisional tax - the essentials

If you pay provisional tax, use our quick guide to stay on top of your instalments without any nasty cash flow surprises.

It’s a good idea to put money aside in time for your provisional tax payments throughout the year. If you have a March balance date, an instalment is due 28 August. Check Inland Revenue’s calendar reminder (external link) if you’re unsure.

If you’re new to provisional tax, or not quite sure what it is, here’s a quick guide to the basics.

How it’s calculated

The amount of provisional tax you pay is based on your expected profit for the year. It’s calculated from one of these methods:

  • Standard – based on your previous year’s residual income tax (RIT) plus 5%.
  • Estimation – based on your estimated RIT for the year.
  • Ratio – Based on your GST taxable supplies.

The different methods suit different businesses, so it’s worth figuring out which is right for you. If you don’t specify a choice, you’ll be charged using the standard method.

See Inland Revenue’s guide to each calculation method (external link) – and exceptions that apply

Provisional tax explained

Provisional tax is income tax paid in instalments throughout the year, instead of a lump sum at the end of the year or through PAYE. If you pay it, it’s typically because you had more than $2,500 to pay Inland Revenue at the end of the previous tax year.

Once you’ve filed your annual tax return, Inland Revenue compares what you’ve paid with the amount you are required to pay, based on your actual profit for the year. You will either get a refund or be required to pay any difference.

When payments are due

When and how often you pay provisional tax each year depends on the method you use to calculate your provisional tax, and if you’re registered for GST.

Once you know when your payments are due, map these out for the year so you’re always prepared for the instalment due dates. 

When it’s your first year in business

It’s hard to estimate your annual earnings when you’re starting out, but that doesn’t mean the year is tax-free. You'll need to file an income tax return at the end of your first year and pay any RIT.

If your RIT is more than $2,500, you may have to pay provisional tax for your second year in business as well as any tax due for your first year. 

Your first provisional tax instalment is often due before the tax bill for your first year of business – so it’s a good idea to start budgeting for these payments and put some money aside.

Your first provisional tax instalment is often due before the tax bill for your first year of business – so it’s a good idea to start budgeting for these payments and put some money aside.

Can I make extra payments to bring down my tax bill?

Yes. These repayments can be made at any time during the tax year. 

If you’re registered for GST, you can also make voluntary repayments when you pay your GST.

Overpaying will earn interest, but at a lower rate than in a high-interest savings account or term deposit. Accounting firm BDO New Zealand shares its tips on making this money work harder for you in Tips to ease your tax payment pain

For more on provisional tax and small businesses, see Income tax and provisionla tax.

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