The way you pay your income tax under the Provisional Tax method is different for your first year in business than for subsequent years.
The first year
At the end of your first financial year, usually 31 March, you (or your accountant or bookkeeper) work out your net taxable income, and calculate the tax you pay on that. If you want to spread the load a bit rather than pay your whole tax bill at the end of the year, you can choose to make voluntary payments throughout your first year.
After the first year
After your first year, you’ll need to pay Provisional Tax.
Apart from the AIM process noted above, there are 3 other provisional tax payment methods:
- Standard Option
- Estimation Option
- Ratio Option
Here’s how it works:
Under both the Standard and the Estimation Options you will pay provisional tax in three instalments during the year – usually 28th August, 15th January and 7th May (for a March year-end)
When you have filed your income tax return for a year, your next year’s provisional tax amounts are based on the tax payable as per the previous year’s income tax return plus a percentage increase.
If you have filed the previous year’s return before the due date for your first provisional tax instalment for the next year, the increase is 5%, otherwise the increase is 10% of the preceding year’s filed income tax return.
You estimate what your income will be for the coming year, and work out the tax payable on your estimate.
At the end of the year you work out your actual income. If you earned more than your provisional taxable amount, you may need to make an extra payment known as ‘Terminal Tax’. If you earned less than your provisional taxable amount and you’ve paid too much tax, you can get a refund or a credit towards next year’s payments.
The IRD will charge you interest on underpayments of provisional taxes if your final liability is more than your provisional taxable amount. If you use the Standard Option the interest applies from the third instalment date, if you use the estimation option any interest will be charged from the first instalment date.
If you are GST registered, you calculate your provisional tax by applying a ratio percentage to the taxable supplies in your GST returns so your provisional tax instalments align with your business cashflow.
Note - you only have to pay Provisional Tax if your tax bill for the previous year is $2,500 or more.