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Provisional tax - how does it work?

Paul Martin • Jul 17, 2020

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.

Economic downturn and provisional tax

 

 

With the current tough economic conditions, many clients are rightly questioning the amount of provisional they should be paying at the first 2024 payment date of 28 August 2023 and asking us to re-estimate the payment amount down.

 

 

There is a catch with this however. If you elect to pay less provisional tax and then your income picks up later in the year, you may be liable for penalties and interest for underpaying the first provisional tax payment. You will also possibly have larger payments to make later in the year which could impact your cash flow.


While the IRD does have some discretion to write off penalties and interest in the current climate, I strongly recommend to only re-estimate your provisional tax payment down for this first installment if you are facing a significant decrease in income. Given the uncertainty of the year ahead and the fact that many clients we've spoken to are actually not experiencing the downturn in business they anticipated during the lockdown period, we recommend delaying this decision until the second and third installments in January and May. By then we will have a much clearer picture of profitability over the year and will be better placed to estimate your annual tax liability up or down as required.

 

It is important to keep your tax plan current. If circumstances change then we do need to discuss and adjust your plan accordingly so please do contact us.

How the new Government and coalition agreements might affect owners of residential rental properties

By Paul Martin • 04 Dec, 2023
There were some key takeouts of interest to many of our clients from the recently signed coalition agreements between National, ACT and New Zealand First and the formation of the new Government. In particular there are a number of policies which will likely benefit landlord clients who own residential rentals. I have summarised some of these below. 1. Return of Interest deductibility for residential rental properties Interest deductibility for residential rental property owners will return. It will be phased back in over three tax years: • 2023/24 tax year: 60% of interest cost will be deductible. • 2024/25 tax year: 80% of interest cost will be deductible. • 2025/26 tax year: 100% of interest cost will be deductible. 2. Reduction in bright-line period National signalled in their pre-election campaign that the bright-line period for residential rental property sales would reduce from 10-years to 2-years. While the exact implementation of this policy is not yet known, it is good news on the horizon for residential property investors. 3. Reinstatement of 90-day no-cause termination notices The new government will reinstate 90-day no-cause tenancy termination notices. This will avoid many unnecessary disputes in the Tenancy Tribunal and gives landlords more confidence in letting to possibly “marginal tenants". Many landlords have avoided what they considered to be risky tenants because eviction for anti-social behaviour was so difficult. With this reinstatement, landlords might be more inclined to give a marginal tenant a chance because they know that if the tenant misbehaves, they won’t be stuck with them. If you would like more information on how these changes might affect your personal circumstances, please feel free to contact us to discuss further.

How does provisional tax work, especially in an economic downturn?

By Paul Martin • 18 Jul, 2023
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.

How to handle inflation as a sole trader

By Paul Martin • 18 Jul, 2023
Sole traders have had an especially difficult few years as inflation surges. We have got three tips to help lighten the load for your sole trader business. 
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