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/income for the year. In practical terms, the amount of provisional tax you are expected to pay is based on the tax you were liable for on your profit/income 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 2027 payment date of 28 August 2026 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.

The IRD is no longer writing off penalties and interest as they had been during and after the Covid crisis, so I strongly recommend to only re-estimate your provisional tax payment down for this first instalment if you are facing a significant decrease in income. Given the uncertainty of the year ahead we recommend delaying this decision until the second and third instalments 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.

If you do re-estimate your provisional tax downwards and subsequently find you've not paid enough provisional tax, we can organise for you to purchase the shortfall provisional tax payments from a tax pooling agent.  You are in effect purchasing someone else's overpayment to make up for your underpayment.  Whilst there is a fee for this service, it is fully tax deductible and comes with other benefits you may not have considered.  On transfer of funds from a tax pool to your tax account, IRD penalties and use of money interest are instantly removed and your reputation for paying tax on time with IRD is restored to its previous standing, as if you'd never short paid in the first place.  We recommend Tax Management New Zealand, the original tax pooling agent.  Talk to us about tax pooling any time and whether it will work for you in your situation.

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.