Income tax and provisional tax Tāke moniwhiwhi me te tāke tārewa

Mistakes in your return

If you only made a small mistake on your Individual tax return (IR3), you don’t need to send in a corrected return. You may be able to simply correct the mistake in your next return or call Inland Revenue to discuss your situation.

For self-employed contractors who usually pay provisional tax, tax laws offer a way to reduce these lump sum instalments.

• Contractors hired and paid through a recruitment agency, or other labour hire business, must have tax deducted from their pay.
• Other contractors can opt-in to have tax deducted from their pay if their payer agrees.
• Contractors can choose the rate to have tax deducted at, if tax is deducted from their pay.

If you're a sole trader, follow this checklist to help you with essential financial tasks.

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 that cost more than $1,000 and have a life span of 12 months or more.

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the item, you claim for the amount it depreciates each year – that is, the value lost through wear and tear or becoming out of date.

Owing less than $5,000 of income tax to Inland Revenue

If you have to pay less than $5,000 of income tax, you just need to make one payment at the end of the tax year. You don't need to worry about provisional tax.

Note that tax to pay is also sometimes called residual income tax (RIT).

Owing more than $5,000 of income tax to Inland Revenue

If you have to pay more than $5,000 of income tax, you 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 four ways to calculate it.

• Accounting Income Method (AIM) – this works through accounting software and allows you to pay smaller amounts, more often, based on your current year’s cashflow. Your accounting software does all the calculations for you, at the same time as it works out your GST.
• Standard – this is 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 is 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 use AIM, your due dates for provisional tax will be monthly or two-monthly (the same as your GST dates). 

If you use the standard or estimation option, 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.

If you have a tax advisor, ask them what’s the best option for you to pay provisional tax.

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.

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 AIM provisional tax when your software tells you, if you are using AIM
• pay your provisional tax instalments on the dates confirmed by Inland Revenue, if you’re using one of the other three options
• contact Inland Revenue early if you think you may have trouble meeting any of these due dates.

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 AIM provisional tax when your software tells you, if you are using AIM
• pay your provisional tax instalments on the dates confirmed by your tax agent or Inland Revenue, if you’re using one of the other three options.

Making payments

You can pay:

• online via internet banking
• online via credit card (a service fee applies).

Trading via an auction or classified site

If you use an online auction site like TradeMe to sell first- or second-hand goods, or to advertise your services, you might be considered a business and have to pay tax on money you receive.
If you’re unsure, contact Inland Revenue.

Selling goods online to overseas countries

If you’re an e-commerce business that trades overseas, and are paying income tax in both New Zealand and abroad, check with Inland Revenue if New Zealand has a double tax agreement with those countries. If so, you could be eligible for a tax credit.

These are some common mistakes to keep an eye on when managing your income tax.

• Failing to set money aside for your tax bill – you don’t want to end up with a big bill that you can’t pay.
• 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.
• Calculating schedular payments on the amount after GST, not before.