Provisional tax changes explained

Provisional tax changes explained

Provisional tax changes explained 765 450 Lee Stace

We are fielding a few queries about the provisional tax changes that apply from the 2018 tax year onwards.

Below is a summary of the new rules for taxpayers who use the standard method to calculate their payments.

Smaller taxpayers (including companies and trusts)

Inland Revenue (IRD) has changed what it calls  the ‘safe harbour’ provision.

If:

  • Your actual income tax liability for the year is less than $60,000; and
  • You paid the tax amount required as per the standard method at your three provisional tax dates.

Then:

  • You will not be charged IRD interest if you did not pay enough provisional tax, provided you pay the final balance by your terminal tax date.

The safe harbour threshold was previously $50,000 and applied to individuals only.

Medium and larger taxpayers

The second change affect medium and larger taxpayers.

If:

  • Your actual income tax liability is $60,000 or more; and
  • You paid provisional tax for that year based on the standard method.

Then:

  • You won’t be charged IRD interest if you paid the amounts of tax due as per the standard method at your first and second instalments, even if your actual liability is higher.
  • The final balance will be due at your third provisional tax date. IRD interest applies on any underpayment or overpayment of tax from the third provisional tax date.

Capping the liability at the first and second instalments provides certainty, particularly if your income is volatile or seasonal.

Having the final balance due at the third provisional tax instalment is sensible because you should have a good estimation of your actual liability by then.

Greater flexibility through tax pooling

You may be charged interest if you pay less than the uplift amount on the dates required. Interest will be charged on the lower of the uplift or one third of the actual liability due.

TMNZ gives you flexibility.

You can tell IRD you are using the standard method, but pay whatever you want at your first and second instalments (but no more than the uplift amount) based on how your year is tracking.

Once the actual liability is known, you can top up any underpayments to the required level via TMNZ to reduce your interest costs.

To learn more about how the new rules affect you, download the PDF below.

Lee Stace

Lee Stace is the PR and Content Manager at Tax Management NZ.

All posts by: Lee Stace

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