What you need to know about provisional tax right now
Provisional tax is income tax which you pay in installments throughout the year. If you want to understand the nitty gritty of how it works read Sophie’s blog.
While paying provisional tax can help to spread your tax load, before now it had been costly if you underestimated how much tax you needed to pay at each installment date.
Provisional tax installments are due on 28 August, 15 January and 7 May. However, if you file six-monthly GST returns you only have two installment dates: 28 October and 7 May.
THE MAIN CHANGE
The most important change is how and when interest and penalties are charged. Previously, if you underestimated how much tax to pay you would be charged interest and penalties from the first installment date. Inland Revenue will now be applying interest and penalty charges for underpayments from the final installment date only, provided you’re paying on time and using the standard option to calculate your tax.
This is much fairer as by the end of tax year you’re in a good position to accurately calculate how much tax you owe. Even if your payments in August and January were slightly under you should be able to make up the difference in your final payment and avoid charges altogether.
THE SAFE HARBOUR THRESHOLD IS ALSO INCREASING
Inland Revenue has thresholds to decide whether individuals or businesses get charged interest and penalties - this is called the “safe harbour”. The previous thresholds were $2,500 of tax for companies and $50,000 for individuals. This is increasing to $60,000 for both individuals and companies.
OTHER THINGS YOU NEED TO KNOW
If you choose to estimate the tax that you pay - rather than use the standard option then you fall outside of the rule changes. You will still be subject to interest and penalties from the first installment date if you underpay.
If you’re our client we’ll be touching base over the next week to let you know how much your 28 August payment will be. Until then keep living #TheDream.