Increased provisional tax threshold: Legislative application

Increased provisional tax threshold: Legislative application

Increased provisional tax threshold: Legislative application 765 450 Lee Stace

The rules that determine whether someone must pay provisional tax are still the same in terms of how IRD applies them.

However, what’s not the same for the 2021 and future tax years is the point at which they are applicable to a taxpayer.

That’s the important thing to remember if you’re struggling to wrap your head around how the increase to the provisional tax threshold works. (Don’t worry, you’re not the only one given the number of questions TMNZ has fielded recently from accountants in relation to this topic.)

Indeed, the legislation regarding whether a taxpayer has an obligation to pay provisional tax – particularly the rules found in sections RC3, RC6, RC9, RC13 and RC14 Income Tax 2007 – is essentially read and applied by IRD in the same manner it was before this change happened, albeit residual income tax (RIT) of $2500 has now been replaced with RIT of $5000.

That’s it. Nothing else is different.

To illustrate that point, let’s look in more detail at how the provisional tax threshold increase impacts the 2021 tax year.

How it works in practice

Under the standard uplift method, provisional tax for the upcoming year is based on either:

  • The RIT for the 2020 tax year uplifted by 105 percent (CY-1); or
  • The RIT for the 2019 tax year uplifted by 110 percent (CY-2) if the 2020 tax return has not been filed and doesn’t need to be until 31 March 2021.

If a taxpayer is basing an instalment for the 2021 year on CY-1 – or CY-2 if they have yet to file CY-1 – and the RIT in the return that is being used to work out what is due and payable at that point in time is $5000 or less, then they will have no obligation to pay provisional tax at that particular instalment date.

It does not matter one iota if, during the prior year that is being used for the uplift calculation, they were a provisional taxpayer due to their RIT in that year exceeding the old threshold of $2500.

The new threshold is all that matters.

Example

Meet Karen. She is a taxpayer with a 31 March balance date who has used the standard uplift method to calculate her provisional tax for the past two years.

She has the following RIT and filing date information.

Tax YearRITDate tax return was filed
2019$450031 March 2020
2020$35,000 Yet to file

Her accountant has an extension of time arrangement with IRD and tells her he won’t be filing her 2020 tax return for at least another six months. As such, he is going to use her 2019 RIT as the basis to work out her first payment for the upcoming year.

Karen’s first provisional tax instalment for the 2021 tax year is due on 28 August 2020 (P1).

However, because her RIT for the 2019 tax year was $5000 or less, she won’t have to make a payment at P1. The uplift amount due and payable will be $0.

The fact she was a provisional taxpayer during the 2019 tax year, albeit under the old threshold, means nothing.

If Karen gets to 15 January 2021, the date of her second provisional tax instalment (P2), and her accountant has still not filed her 2020 tax return, then she will not have to make a payment at P2 either. Again, the uplift amount due and payable will be $0.

Only when her accountant files the 2020 tax return will she become a provisional taxpayer. This is because the RIT for that year exceeds the $5000 threshold.

Karen’s accountant must legally file the 2020 tax return by 31 March 2021.

Assuming this is the date they intend to file the previous year’s return, then she will need to pay something at 7 May 2021 (P3).

What is the amount she should pay P3?

That’s a good question. What Karen should pay at P3 really depends on how her 2021 tax year unfolds.

It will be ONE of the following:

  • Nothing – if the 2021 RIT is going to be 5000 or less. This is because Karen is not a provisional taxpayer under section RC3 (1) Income Tax Act 2007 for that year. Any income tax she does owe for 2021 tax year will be due and payable at her terminal tax date because she meets the safe harbour interest concession rules found in section 120KE (1) and (2) Tax Administration Act 1994.
  • The 2020 RIT uplifted by 105 percent – if she thinks the 2021 liability will be less than $60,000. Any remaining balance to settle what she owes for the 2021 tax year will be due and payable at her terminal tax date, again because she meets the safe harbour interest concession rules mentioned above.
  • The expected 2021 RIT – if Karen expects this to be $60,000 or more. This is because she would fall out of safe harbour and into the rules found in section 120KBB Tax Administration Act 1994. These rules see someone who pays the uplift amount on time and in full at P1 and P2 only incur IRD interest from P3 if they have not settled their liability for the year in full by this date.
  • The expected 2021 RIT – if Karen expects this to be LESS THAN the uplifted 2020 RIT. Again, the interest rules in section 120KBB will apply if what she pays at P3 turns out not to be enough to settle the actual liability for the year.

Please contact us if you have any questions about the increase to the provisional tax threshold.

We’re happy to help.

Lee Stace

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

All posts by: Lee Stace

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