First year of trading and provisional tax
What are a taxpayer’s provisional tax obligations in their first year of trading?
This is a question we receive a lot. In fact, there is certainly a lot of confusion out there.
As most know, their first year of trading is not tax-free. However, when income tax is due and payable depends on a taxpayer’s residual income tax (RIT) for the year and if they are a 'new provisional taxpayer'.
So, with that in mind, we explain below how the provisional tax rules work for the 2018 tax year onwards.
First year of trading: RIT is less than $60,000
Any income tax due for the year is due on your terminal tax date.
Interest will apply from this date if a taxpayer does not pay by then.
However, if the RIT is more than $5000 in their first year of trading, they will be a provisional taxpayer for the following year.
First year of trading: RIT is $60,000 or more
Inland Revenue (IR) may charge interest if you fall into the ‘new provisional taxpayer’ category.
The new provisional taxpayer criteria are different for individuals and companies/trusts.
Individuals are a new provisional taxpayer if:
- Their RIT for that tax year is $60,000 or more
- Their RIT in each of the four previous tax years was $5000 or less
- They stopped receiving income from employment and started to receive income from a taxable activity during that tax year.
Companies/trusts are a new provisional taxpayer if:
- Their RIT for that tax year is $60,000 or more
- They did not receive taxable income from a taxable activity in any of the four previous years
- They started receiving income from a taxable activity during that tax year.
Please take note of the different criteria for individuals and companies/trusts. This catches taxpayers out.
It is important to mention the term 'taxable activity' has the same meaning as it does in section 6 Goods and Services Tax Act 1985. However, for the purposes of provisional tax, the exclusion in the Act pertaining to GST-exempt supplies does not apply.
As such, determining if you are a new provisional taxpayer can be tricky in some instances.
From what instalment(s) will IR charge interest for new provisional taxpayers?
IR may charge interest (see the current rate here) on the number of provisional tax payments a taxpayer could have made during the first year of trading if you meet the new provisional taxpayer criteria.
Of course, that number depends on the date on which their business starts trading.
For someone with a 31 March balance date, refer to the table below.
| If a taxpayer’s first year of trading starts… | Then the number of provisional tax instalments payable is… |
| Before 29 July | Three (28 Aug, 15 Jan and 7 May) |
| On/after 29 July but before 16 December | Two (15 Jan and 7 May) |
| On 16 December or any time after that | One (7 May) |
These dates will differ if your balance date isn't 31 March or you file GST returns on a six-monthly basis.
The amount due at each provisional tax instalment
So, what happens if you meet the new provisional taxpayer criteria in your first year of trading?
Well, put simply, IR will divide your RIT for the year by the number of instalments you were liable to pay per the table above.
For instance, say your business starts trading on 1 October and your RIT for the year was $69,000.
IR will charge interest from two provisional tax dates: 15 January and 7 May. The amount on which interest will accrue at each date will be $34,500.
On the positive side, late payment penalties will not apply.
Reducing exposure to IR interest
Taxpayers may wish to make provisional tax payments in their first year of trading to mitigate their exposure to IR interest if they expect their RIT is going to be $60,000 or more.
If they are an individual or a partner in a partnership and meet certain criteria, they may also get an early payment discount of 6.7 percent on these payments.
TMNZ’s Flexitax lets you reduce the IR interest cost on the tax owing by a significant amount.
This is done by applying surplus tax paid to IR on the date it was originally due against your liability. IR treats this as if you paid on time, eliminating any interest and late payment penalties incurred.
This article has been written in general terms only. You should not rely upon this to provide specific information without also obtaining appropriate professional advice after detailed examination of your situation.
Prodigy Hair Industry cuts tax stress
Krystle Walker from Prodigy Hair Industry loves cutting and styling hair. She does not love provisional tax.
That’s why she uses TMNZ. They cut away the stress this causes her so she can focus on running and improving her salon.
But we'll get to that. First, some background.
The Prodigy Hair Industry story
Krystle is the owner and manager of Prodigy Hair Industry. It's in Upper Hutt, a city about 30 minutes outside of Wellington.
She has been plying her trade as a hairdresser for 12 years. Four of those have been at Prodigy Hair Industry.
It’s a stylish set-up she’s got on Fergusson Drive.
Things are humming nicely at Prodigy Hair Industry too. Seven staff on the books and a good customer base are a testament to that.
The challenges of being a business owner
Krystle is still wearing her training wheels in term of running her own business.
As she is discovering, transitioning from employee to employer is not without its challenges. There are wages to pay and hair products to purchase, among other things. Cashflow is a biggie.
Provisional tax is another challenge.
Krystle admits she is not a tax geek. In fact, in an ideal world it would probably be something she would not have to concern herself with.
But alas, this is not an ideal world. She knows there is no escaping the clutches of the taxman. Falling out with Inland Revenue (IR) has serious repercussions too.
Taking care of provisional tax so she can take care of business
Krystle avoids any such precarious situations with TMNZ.
Her tax pooling arrangement means her tax is taken care of. She makes payments when her business cashflow permits and TMNZ applies these to the correct tax dates.
No need to worry about late payment penalties. There is interest to pay. However, this is much lower than what IR charges when someone doesn't pay tax on time.
“It does reduce the stress month to month. Knowing that you have got my back, I don’t have to worry about that,” she says.
It allows Krystle to get on with doing what she does best – cutting and styling hair and making sure Prodigy Hair Industry is satisfying its customers’ needs.
“I can put 100 percent into the business and my staff.”
The concept of paying provisional tax through TMNZ was about as familiar as the Klingon dialect when her accountant first broached the idea.
But after hearing how it operates with the blessing of IR, Krystle says it was too good to pass up.
Now she has no qualms about recommending TMNZ to others occupying a similar waka to Prodigy Hair Industry.
“It’s great, especially for small business owners.
“It just gives me the confidence with my day-to-day cashflow.”
TMNZ is New Zealand’s first and largest tax pooling provider. Get in touch to learn more.
Cashflow survival: Dealing with terminal, provisional tax
The months of April and May can really tax your cashflow.
On 7 April, Inland Revenue (IR) expects you to pay terminal tax for the 2018 income year.
Terminal tax means a taxpayer did not pay enough provisional tax for the previous year. As such, they need to square up the difference.
To make matters worse, IR may also be applying interest of 8.22 percent to this underpayment.
A month later, IR will ask for more tax to be paid. This time it will be a taxpayer’s final instalment of provisional tax for the 2019 tax year.
So not one income tax payment, but potentially two. It’s hardly ideal, is it?
The cashflow challenges presented by this tax double-whammy can be a worry.
But don’t fret. Keep calm and cool. Here's what you can do to survive the taxing months of April and May.
Don't let the 7 April terminal tax become, er, terminal
Deal with the terminal tax first as it's the oldest tax debt.
If you do not do so by 7 April, late payment penalties will kick in. You will also register a blip on the radar of IR’s debt collection team.
That's the last thing you want.
What if IR is already charging interest on the terminal tax due?
You can make significant savings by paying through an approved tax pooling intermediary.
They do this by applying surplus tax paid to IR on the date it was originally due against your liability. IR treats this as if you paid on time, eliminating any interest and late payment penalties incurred.
They also offer an additional 75 days past your terminal tax date to settle your 2018 terminal tax.
Review your 2019 year
For many, their financial year ended on 31 March. The 7 May instalment of provisional tax is the final payment for the 2019 tax year.
Given this, you will have a rough idea if you have overpaid or underpaid income tax. Review how your business performed and adjust your payment accordingly.
After all, there is no point paying more tax than you need to, right?
Manage cashflow by paying 7 May prov. tax at a time that suits you
According to Xero’s 2018 Small Business Insights, only 42.8 percent of small New Zealand businesses were cashflow positive in May. That’s not as bad as January, but it can still be a difficult time for some.
If paying provisional tax is likely to trigger a cashflow squeeze, tax pooling can offer some payment flexibility.
It gives you the option of:
- Paying provisional in instalments.
- Deferring the full payment to a time in the future that better suits your cashflow.
Both payment plans reduce IR interest costs and eliminate late payment penalties.
Don’t forget
As always, make sure you have a chinwag with your accountant. The sooner, the better.
A good accountant can help you plot a course of attack and recommend solutions which work best for your business.
So, there you have it. A few pointers on what to do to ensure April and May do not tax your cashflow.
TMNZ is New Zealand’s largest tax pooling provider. For more information on how it can assist with paying provisional and terminal tax, check out our FAQs. Alternatively, get in touch
TMNZ's provisional tax calculator
At TMNZ, we're 100% invested in simplifying provisional tax for New Zealand businesses. Our provisional tax calculator helps you by removing the time and strain of calculating your provisional tax payments.
- The tax calculator tool helps calculate provisional and terminal tax liabilities.
- We help you choose the best time to file. Toggle potential tax filing dates to see if there's an impact on your tax bill.
- One step payment arrangements. Once you know the liability, you can set up a payment plan with Flexitax.
The information you need to use the provisional tax calculator
All that you require is:
- Your IRD number
- Your residual income tax (RIT) for your last two tax years, the dates the income tax returns for those years were filed, and the expected/final RIT for the current year.
How to calculate your payments
To use our provisional tax calculator, log in to your TMNZ dashboard.
If you've not already done so, you can register for free.