Provisional Tax

Provisional Tax is not a separate tax but a way of paying your income tax as the income is received through the year. You pay instalments of income tax during the year, based on what you expect your tax bill to be. The amount of provisional tax you pay is then deducted from your tax bill at the end of the year.

If your residual income tax is $2,500 or more you will have to pay provisional tax for the following year. Residual income tax is basically the tax to pay after subtracting any rebates you are eligible for and any tax credits (excluding provisional tax). Residual income tax is clearly labelled in the tax calculation in your tax return.

There are two ways of working out your provisional tax. One is the standard option and the other one is the estimation option. If you are also registered for GST and meet the other eligibility criteria, the ratio option may be available to you as well (see below for more on the GST Ratio option).

Standard option

The IRD automatically charges provisional tax using the standard option unless you choose the estimation or ratio options.

The standard option takes your residual income tax for the previous year and makes an adjustment. The calculation for the adjustment from the current year is:

  • Your previous year's residual income tax with an uplift of 5% added
  • If the previous year's income tax return has not been filed, it will be the year prior to the previous year with an uplift of 10% added. 


Estimation Option

The other way to work out your provisional tax is to estimate what your residual income tax will be. When working out the tax, keep the following points in mind:

  • To get the right tax rate -
    • Add up all your estimated income
    • Work out the tax on the total
    • Subtract any tax credits (like PAYE)

Using the estimation option, if your estimated residual income tax is lower than your actual residual income tax for that year, you may be liable for interest on the underpaid amount


You can estimate your provisional tax as many times as necessary up until your last instalment date. Each estimate must be fair and reasonable


Due dates

The due date and amount of instalments you need to make for payment of your provisional tax each year depends on your balance date, which of the above options you use and how often you pay GST (if registered).

If you have a 31 March balance date and use the standard or estimation option, provisional tax payments are due on:

  • First instalment 28 August
  • Second instalment 15 January
  • Third instalment 7 May


Interest

In most circumstances you will be charged interest if the provisional tax you paid is less than your residual income tax. If the provisional tax you pay is more than your residual income tax, the IRD may pay you interest on the difference.

Another Option – the GST Ratio Option

If you are also registered for GST you are able to pay your provisional tax at the same time as your GST payments. You will be able to use the ratio option if:

  • You've been in business and GST-registered for all of the previous tax year, and the tax year prior to that
  • Your residual income tax for the previous year is greater than $2,500 and up to $150,000
  • You are liable to file your GST returns every month or every two months
  • The business you're operating is not a partnership
  • Your ratio percentage that IRD calculates for you is between 0% and 100%
  • This method of paying provisional tax may not suit everyone. Solutions such as tax pooling can also be used to ease taxpayers' concerns and costs in calculating provisional tax. We suggest that you discuss your options with your accountant.

For further information on provisional tax give us a call or refer to the IRD Website.

What People Say About Us

Ian Gundensen 
Ian Nicholas and his team at "The Accounting Room" have been our accountants for 10 years simply because we believe they are the best for our situation. We learnt many years ago that to be successful you need a good team around you.

We needed someone who would listen, treat us as a person and not just a number. Above all someone who had the knowledge, skills and professionalism to help us achieve our goals.

Marion and I appreciated the advice they gave us when we set up "The Gundy Development Company" and we have no hesitation in strongly recommending their services to anyone who requires professional guidance with such complexities as taxation.


Ian Gundesen - Director. Author, Inventor, Licensed Auctioneer.



During the 3 years I worked out of NZ, Ian and the team from the Accounting Room kept me right with the New Zealand tax laws. The Accounting Room team worked closely with my Australian tax accountant and between them I was able to minimise my taxes. I found them to be a very professional team and would have no hesitation in recommending them as the accountants of choice.



Sandy Mutch - A B MUTCH CONSULTANCY PTY LTD



4 seasons
|| www.4seasons.co.nz ||

We have been clients of The Accounting Room (formally Everest and Vincent) since we purchased our business 10 years ago. As first time business owners we needed an accountant who would explain things in language we would understand, someone we could trust 100%. We found that and more with the staff at The Accounting Room, especially Anthony Vincent who has and still does look after us. Anthony is our accountant but we also regard him as a friend. Nothing is ever too much trouble for Anthony or any of the staff and when you call you are always greeted warmly. Without hesitation we have and would recommend The Accounting Room and wish the team every success in their endeavours.


Glynn and Debbie Taylor - Owner operators - 4 Seasons NP Ltd



Therapy Works
|| www.therapyworks.co.nz ||

Therapy Works has worked with Ian and The Accounting Room from the outset of starting up our business just over 10 years ago. We have greatly valued his advice and expertise in ensuring our financial systems are both efficient and easy to understand. Ian’s high standard of professionalism and attention to detail cements our high level of trust with the company. We look forward to an ongoing working relationship and have no hesitation in recommending The Accounting Room to other businesses!


Michelle McIntosh – Therapy Works Ltd



Guize Clothing
|| www.guize.co.nz ||

I have been a client of Anthony Vincent and the team at “The Accounting Room” for many years. I have found there financial scrutiny and customer service to be second to none. They are very approachable any time of the day whether to obtain advice or just to clarify taxation queries. I have found them to be very knowledgeable within their field and always up to date. Their manner is always professional and courteous. I am very happy to have Anthony and the team working for us, and look forward to many more years of this working partnership.


Brett Stokell – Managing Director – Guize Clothing Ltd



CSA Surfboards
|| www.csasurfboards.co.nz ||

The Accounting Room save our company time and money – just what you want. We are grateful to have an accountant that is up-to-date with technology, approachable, prompt and a clear communicator. We are a small business but Ian gives us the time, advice and respect to be big.


Bianca Aldridge | CSA Surfboards



The Cleaning Angels
|| www.angelswhoclean ||

I would highly recommend Anthony Vincent and The Accounting Room team to anyone needing accounting services. Anthony has helped my business grow and has been there for me anytime I had queries. Anthony is kind, patient and genuinely wants to help. All the staff I have encountered at The Accounting Room are like this, very helpful and genuine people who all do an extremely good job.


Glenwyn Flynn – The Cleaning Angels



Brokers Panel & Paint
|| www.brokerspnp.co.nz ||

The Accounting Room are a very professional and helpful group of people to deal with. When I started my business I had no knowledge of accounts or any of the processes involved in running the financial side of a business. The Accounting Room made this learning period very simple and were always available to explain and help me to learn. Now that my business has grown they are still helping me with new advice to help continue the growth of my business.


Kurt Broker – Owner/Manager , Brokers Panel and Paint Ltd