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Income tax and provisional tax

Income tax and provisional tax are the same tax — provisional tax is just a way of pre-paying your annual tax bill. As a small business owner, you'll pay each tax year’s tax either in one lump sum, or by way of provisional tax in several instalments.

If Inland Revenue tells you to pay provisional tax, set money aside.

If Inland Revenue tells you to pay provisional tax, set money aside.

The first instalment may have to be paid soon after you’ve filed your tax return for the previous tax year.

In your first year of trading, you don't file an income tax return until after the end of the tax year (31 March). This might be up to 11 months after starting out, depending when you started your business.

Either way, you should start putting aside money for your tax bill as soon as income starts coming in. This will help ease the cash flow in your second year, when you might need to pay provisional tax for that year as well as the tax for your first year in business.

You have to file your return for the year ending 31 March by 7 July — unless you have an extension, or use an accountant or a tax agent (they may get an extended deadline).

Once you've worked out what you owe, the due date of your first tax bill for the year ending 31 March will be 7 February the following calendar year (or it may be extended to 7 April if you have an accountant or tax agent).

Put money for your tax bill in a high-interest account.

Put money for your tax bill in a high-interest account.

The interest may be enough to cover expenses such as tax agent fees or your ACC levies.

Filing your return

Your income tax return is due on 7 July each year, unless you have an extension. If you have accountant or tax agent, they may also get an extension.

  • If you're a sole trader, file an Individual income return (IR3).
  • If you're in a partnership, each partner needs to file an IR3 and your business needs to do a partnership income tax return (IR7).
  • If you're set up as a company, your business needs to file a companies income tax return (IR4).

You’ll also need to include either a copy of your business’s financial records, or a form summarising your income and expenses (IR10).

You can file all your returns online, or download the forms you need from the Inland Revenue (IR) website (external link) .

If you’re worried you won’t be able to pay in full and on time, call Inland Revenue on 0800 377 772 to see what support might be available.

If you’re worried you won’t be able to pay in full and on time, call Inland Revenue on 0800 377 772 to see what support might be available.

If you just don’t pay, you’ll be charged interest and may face a penalty.

Claiming expenses

Include the total amounts for all your different business expense types in your return — you don't have to provide the receipts to Inland Revenue unless requested to do so, but you do need to keep them for at least seven years.

Depreciation

Depreciation is a way of claiming back some money on the assets you buy for your business. It's a bit like claiming expenses, but instead of claiming against the total cost of the item, you claim for the amount it depreciates each year — that is, the value lost through wear and tear or becoming out of date.

Watch Inland Revenue’s Introduction to income and provisional tax video

Video transcript (external link)

Owing less than $2,500 of income tax to Inland Revenue

If you have to pay less than $2,500 of income tax, you'll just need to make one payment at the end of the tax year — you don't need to worry about provisional tax.

Note: “Residual income tax” is another term for tax to pay.

Owing more than $2,500 of income tax to Inland Revenue

If you have to pay more than $2,500 of income tax (tax to pay is sometimes called residual income tax, or RIT), you'll need to pay provisional tax in instalments during the next tax year, as well as your tax for the previous tax year.

The amount of provisional tax you pay is based on your expected profit for the year. There are three ways to calculate it.

  • Standard — the default option. Your last year's tax to pay + 5% (or your tax to pay from two years ago plus 10%).
  • Estimation — you estimate what you think your tax bill will be for the year. This can be a good option if you expect your income to be lower than last year.
  • Ratio — worked out as a percentage ratio of your GST return. This can be a good option if your income fluctuates a lot.
If you have a tax advisor, ask which option best suits your business.

If you have a tax advisor, ask which option best suits your business.

You'll usually pay provisional tax in three instalments, in August, January and May. If you file GST six-monthly, you'll pay two instalments of provisional tax, in October and May. If you choose the ratio option for provisional tax, you'll pay in six instalments.

When you file your income tax return and calculate your tax for the year, you deduct the provisional tax you paid earlier. If your provisional tax paid is more than your RIT, you'll get a refund and may receive interest on the difference. In some cases, if your provisional tax paid is less than your RIT, Inland Revenue may charge you interest on the amount owing and a penalty.

Read the provisional tax guide (external link)  on the Inland Revenue website.

Due dates and payments

If you're filing your return yourself, you need to:

  • file your return by 7 July
  • pay your residual income tax bill by 7 February the next year
  • pay your provisional tax instalments on the dates confirmed by Inland Revenue.
  • contact Inland Revenue early if you think you may have trouble meeting any of these due dates.

Note: “Residual income tax” is another term for tax to pay.

If you use a tax agent, you need to

  • check when they need all your tax information by
  • pay your residual income tax bill by 7 April the next year
  • pay your provisional tax instalments on the dates confirmed by your tax agent or Inland Revenue.

Making payments

You can pay:

  • online via internet banking
  • online via credit card (a service fee applies)
  • by posting a cheque.
Common mistakes

Avoid these common pitfalls to stay on track with your income tax:

  • Failing to set money aside for your tax bill — you don't want to end up with a big bill and no way to pay it.
  • Not filing or paying your tax on time — you'll be charged a penalty if you file late, and interest on any overdue payments.
  • Not keeping records of your income or expenses, or not keeping them long enough — this is required by law.

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