If you had to pay tax of more than $5,000* in your last income tax return, you may have to pay provisional tax for the following year. Provisional tax is like making progress payments on next year's income tax.
The amount you have to pay relates to your expected profit for the year. In practical terms, the amount of provisional tax you're expected to pay is based on the tax you were liable for on your profit in the previous year. This is often referred to as residual income tax (RIT) and your provisional tax will be based on RIT plus a standard percentage uplift as determined by the IRD.
Even if you are not required to pay provisional tax, you may still elect to do so, to spread your tax obligations over the year. This can help you manage cash flow and take away the pressure of having to find and pay a lump sum of tax at the end of the year.
COVID-19 and provisional tax
With the impacts of COVID-19, many clients are rightly questioning the amount of provisional they should be paying at the first 2021 payment date of 28 August 2020 and asking us to re-estimate the payment amount down.