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How to: Provisional tax

What is provisional tax?

Provisional tax is income tax that you pay to Inland Revenue during the tax year if your income isn't taxed when you receive it or if it's taxed at too low a rate. You won't be required to pay provisional tax if your "residual income tax" from the previous tax year (see below) is under a certain amount. Provisional tax is paid in three instalments during the year, at equal intervals. When you file your tax return at the end of the tax year, the amount paid during the year as provisional tax is deducted from any tax owing at the end of the year.

How do I work out if I have to pay provisional tax?

Whether or not you are required to pay provisional tax in the current tax year depends on the amount of your "residual income tax" from the previous year.

Your residual tax is the tax that you owed for that year after any tax credits or rebates have been deducted. Residual tax does not include:

  • any provisional tax paid for the year
  • Family Assistance overpayments or underpayments
  • voluntary tax payments

The threshold amount of residual income tax is $2,500. If your residual tax was $2,500 or more and you expect to it to be at least this amount for the current year, then you are required to pay provisional tax.

If your residual tax was $2,500 or more, but you expect it to be under this figure for the current year, it is your choice whether or not you pay provisional tax. You should be aware, however, that if your residual tax turns out to be $2,500 or more then you may be liable for shortfall penalties.

If your only income is wages or salaries, or resident or non-resident withholding income, then you are not required to pay provisional tax, as these are all taxed at source.

How does the IRD calculate provisional tax?

The IRD operates two procedures for calculating provisional tax – the standard option and the estimate option (see below). Unless you notify the IRD that you wish to use the estimate option, they will automatically use the standard option.

The standard option

This involves adding 5 percent to the figure for your residual tax for the preceding year. If the preceding year's return has not been filed, then 10 percent is added to the figure for the year before that. If you think that your income for the current year will be more than for the previous year you may make voluntary additional payments, should you wish to.

Using the standard option, you may be paid or charged interest, depending on whether you have paid too much or too little provisional tax. Note, however, that this applies only to:

  • non-individuals (that is, company, partnerships and the like)
  • individuals with residual income tax over $30,000
  • trustees
  • those holding a Certificate of Exemption from Resident Withholding Tax

Estimate option

The estimate option requires an estimation of your income and then a calculation of the tax based on this. All income should be included in the assessment. You should subtract any tax credits (such as PAYE) and ensure that you do not include any ACC premiums or levies paid.

Once you opt for the estimate option you are stuck with this for the year; you cannot change back to the standard option during the year. You are, however, entitled to re-estimate at any time up until the third provisional tax instalment is due.

Irrespective of whether you are an individual or a non-individual, you may be charged or paid interest.

Cautionary notes
  • It is very important that you provide the IRD with all information concerning your income and that you advise them should your income change during the year, as this will affect your residual income tax and therefore any provisional tax owed.
  • This area of law is complex and often technical. It is strongly recommended that you seek the services of accountants and lawyers who are experienced in taxation, to ensure that you comply with the provisional tax requirements and to assist you with the procedures involved.

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