Understanding Provisional Tax

To help stop people from being hit with massive tax bills at the end of every tax year, the Inland Revenue Department (IRD) uses a provisional tax syestem.

What is provisional tax?

Provisional tax is the IRD’s tool to prevent huge tax bills at the end of every financial year. If you have a residual income tax bill of over $5,000, you’re required to pay provisional tax across the next financial year.It’s important to note that provisional tax is not an additional tax. It’s the same income tax everyone knows, just paid in instalments

What are option availiable?

The four payment options you can choose from are:

• The standard option;

• The estimation option;

• The ratio option; and

• The accounting income method (AIM)
  

IRD will automatically calculate this for you, but in general, using the standard option, you:

1. Start with your residual income tax amount

2. Add a 5% uplift. If you haven’t filed your previous year’s returns, then it’s a 10% uplift

3. Divide the resulting amount by the number of set instalments.

   • You’ll usually have three instalments, but if you’re registered for GST and file semi-annual returns, then you’ll only pay two instalments.