How to calculate provisional tax payments

A guide on calculating provisional tax payments using the Standard uplift method

The uplift method is the default for calculating provisional income tax. The purpose of this guide is to help you know what obligations are so you know what to pay, when to pay and avoid IRD use of money interest.

Due to the recent government response to COVID-19, we have updated this guide to reflect the new legislative changes. Read more on the COVID-19 tax proposal.

Inside the guide

Free downloadable guide to calculating provisional tax guide from TMNZ

Calculating

Filing

Safe harbour

First year in business

Current version available for download: April 2020
Previously published version(s): August 2019, February 2019, February 2020

Preview: About this guide

Need some help regarding provisional tax and the use of the standard uplift method? You’re not the only one. Tax Management NZ fielded several queries from accountants and business owners alike after IRD changed the rules to coincide with the start of the 2018 tax year. It was a big reason we produced this guide.

The information on these pages has since been updated to reflect the provisional tax amendments contained in the Taxation (Kiwisaver, Student Loans, and Remedial Matters) Bill and COVID-19 Response (Taxation and Social Assistance Urgent Measures) Bill.

Therefore, it is based on our interpretation of the legislation as at 1 April 2020 and how we believe it relates to the payment of provisional tax for taxpayers using the standard uplift method. Where appropriate, we have cited the relevant sections of the Income Tax Act 2007 and Tax Administration Act 1994.

We would like to thank IRD’s policy team for its support and responsiveness in providing clarification for specific scenarios we raised with them.

While this guide may not answer all your questions, or deal with your specific situation, we at least hope it provides some clarity and basic understanding around these rules.

Enjoy the read.

NB. The examples provided in this guide are based on taxpayers with a 31 March balance date using the standard uplift method. They are liable to pay three instalments of provisional tax

Guide sneak peak

About this Guide…

Need some help regarding provisional tax and the use of the standard uplift method? You’re not the only one.

Tax Management NZ fielded several queries from accountants and business owners alike after IRD changed the rules to coincide with the start of the 2018 tax year. It was a big reason we produced this guide.

The information on these pages has since been updated to reflect the provisional tax amendments contained in the Taxation (Kiwisaver, Student Loans, and Remedial Matters) Bill and COVID-19 Response (Taxation and Social Assistance Urgent Measures) Bill.

Therefore, it is based on our interpretation of the legislation as at 1 April 2020 and how we believe it relates to the payment of provisional tax for taxpayers using the standard uplift method. Where appropriate, we have cited the relevant sections of the Income Tax Act 2007 and Tax Administration Act 1994.

We would like to thank IRD’s policy team for its support and responsiveness in providing clarification for specific scenarios we raised with them.

While this guide may not answer all your questions, or deal with your specific situation, we at least hope it provides some clarity and basic understanding around these rules. Enjoy the read.

Tax Management NZ

NB. The examples provided in this guide are based on taxpayers with a 31 March balance date using the standard uplift method. They are liable to pay three instalments of provisional tax.

Disclaimer: The content in this guide is subject to change as IRD regularly reviews the rules to see if they are operating as intended, and publishes determinations clarifying its position on how it will apply the legislation in certain situations. As such, it cannot be relied upon as tax advice. It may be prudent to confirm the position you are taking by speaking directly to IRD.

Calculating the Instalment Amount Due Under the Standard Uplift Method

The amount of provisional tax payable at an instalment date for those using the standard uplift method is calculated using the formula set out in section RC10 (2) Income Tax Act 2007.

(Residual income tax x instalment number ÷ total instalments) – provisional tax

A taxpayer whose income tax liability for the year is going to be $60,000 or more (or less than what was calculated under standard uplift) will use the formula found in section RC10 (5) Income Tax Act 2007 to determine the amount payable at the date of their final instalment.

Expected RIT − tax

Truncation
Please note an instalment amount calculated in this section is truncated to whole dollars (e.g. $1000.33 becomes $1000).

Legislative references: Sections RC5 (4B), RC9 (13) and RC10 (7) Income Tax Act 2007.

Residual income tax (RIT) = the amount of tax a taxpayer must pay on any income derived from a taxable activity, less any PAYE and other tax credits (except Working for Families) to which they are entitled.

Under section RC5 (2) and (3) Income Tax Act 2007, the RIT used for the standard uplift calculation is based on the most recently filed tax return. The figure used will be:
(a) 105 percent of the previous year’s RIT; or
(b) 110 percent of the RIT from two years ago*

Instalment number = the instalment number for that tax year, whether first, second or third.

Total instalments = the number of instalments the taxpayer must pay for that tax year.

Provisional tax = the amount of a taxpayer’s provisional tax liabilities for the tax year to date.

Expected RIT = the taxpayer’s expectation of their RIT for the year.

Tax = is the amount of a taxpayer’s provisional tax liabilities for the tax year to date.

*Please note section RC5 (3)(d) Income Tax Act 2007 prevents a taxpayer from using 110 percent of the RIT from two years ago as the basis to calculate the uplift amount payable at the date of their final instalment.

(pg 5)

The Lesser of 105 and 110 Percent Uplift

Question: What happens when a taxpayer files their tax return for the previous year and goes from using 110 percent of the RIT from two years ago to 105 percent of the previous year’s RIT as the basis to calculate the provisional tax payable?

Answer: IRD will sometimes apply the 105 percent standard uplift calculation retrospectively to determine what is due and payable at any earlier provisional tax instalment(s )— irrespective of when the previous year’s return has been filed.

This happens in situations where 105 percent uplift payments turn out to be less than 110 percent uplift payments.

(pg 6)

What if 105 percent is GREATER THAN 110 percent?

When this applies, uplift can be calculated based on the lower 110 percent amount for any instalment(s) due prior to the date the previous year’s return is filed.

This is based on the premise that a taxpayer cannot pay an amount they do not know about and ensures they are not significantly underpaid based on their total uplift amount.

Legislative reference: Section 120KBB (3B) Tax Administration Act 1994.

IRD will calculate what is owed based on the lesser of either 105 percent or 110 percent. This means it could be advantageous for taxpayers to wait until after P2 to file the previous year’s return.

(pg 7)

Different methods for calculating provisional tax

  • TMNZ have released a Provisional Tax Calculator in the TMNZ Dashboard, the logged in portal of the TMNZ website. Read more about it on the TMNZ Blog. To try it out, simply sign in.

  • If your income tax (RIT) bill was more than $2500, you’ll need to estimate and pay provisional tax.

    There are four methods of calculating provisional tax in New Zealand. These are:

    • The standard option
    • The estimation option
    • The ratio option
    • The Accounting Income Method.

    The two most widely utilised options for working out provisional tax payments are currently the standard calculation method (used in most cases) and the estimation method (only beneficial in specific scenarios).

  • How you calculate your provisional tax payments will depend on which calculation method you utilise. Due to the range of provisional tax options available, it is important to understand how each method will affect your business.

    Choosing the wrong method of calculating provisional tax may result in under, or overpayments, so we recommend talking to your financial advisor before choosing a method.

  • Provisional tax calculations for companies can be complicated, with wrong choices leaving a company vulnerable to terminal tax liabilities and interest on underpayments. At Tax Management NZ we recommend talking to a business tax expert before deciding on an option for working out your businesses provisional tax requirements.

  • The standard calculation method (also known as the standard uplift model) is the most common way of calculating provisional tax in New Zealand. Download the guide above for a comprehensive resource on using this method so you know what to pay, when to pay and avoid IRD use of money interest.

    Basically, the standard calculation method is an ideal way to estimate provisional tax if over the coming year you expect to make more or roughly the same amount of income as the previous tax year.

    When calculating your provisional tax using the standard calculation method:

    • Your amount of provisional tax payable is your previous tax year’s RIT plus 5%. This represents a 105% uplift on last year’s tax liability.
    • This means that if your last year’s tax was $5000, then the IRD will charge $5250.
    • The total amount of tax payable is spread across three instalments. In the example above, this would mean three payments of $1750. You can find your provisional tax dates here.
    • If you file GST returns every six months, you will only need to make two provisional tax payments.
  • When you utilise the estimation method, you will be calculating your provisional tax based on an estimate of your profitability for the tax year ahead. When using the estimation method:

    • Calculate your total projected income for the upcoming year.
    • Calculate your total estimated expenses.
    • Arrive at your taxable income by deducting your estimated expenses from your estimated income.
    • Work out the tax by using the IRD’s tax

    The estimation method of working out provisional tax is useful if you expect your income to drop significantly from the previous year. As with the standard calculation method, you will normally pay provisional tax in three instalments throughout the year.

    However, caution should be used when estimating provisional tax with the estimation method as IRD interest will apply if you have underestimated your tax bill. You may also be liable to incur an additional shortfall penalty.

  • The accounting income method (AIM) is a pay-as-you-go provisional tax calculation for companies with a turnover of less than NZD 5 million. Introduced by the IRD in 2018, the AIM is designed to make provisional taxes easier to manage, more accurate and a better reflection of the actual income earnt by an entity.

    The accounting income method can be a good choice for your business if:

    • Your business has been recently established.
    • Your business is growing
    • You receive an irregular, seasonal, or income that is earned towards the end of your tax year and it is difficult to accurately forecast your income
    • You must have access to compatible business accounting software

    When utilising the accounting income method, you are required to file a statement of activity with the IRD through your accounting software. The IRD use this information to determine whether you must make a payment, and the required amount, and to calculate if you are due a tax refund. In most cases, you will be required to pay provisional tax six times per year. Your statement and payment schedule are based on your GST due dates:

    • Monthly if you’re registered for a monthly filing.
    • Two-monthly if you are registered two or six-monthly filings.
    • If you are not registered for GST, follow the two-monthly schedule.

    Note: you cannot currently use tax pooling with the accounting income method so if you have liabilities to settle, unfortunately TMNZ will be unable to assist.

  • The GST ratio method is a means of calculating provisional tax for GST registered businesses. Like the accounting income method, the ratio method is useful for businesses that experience fluctuating of seasonal incomes.

    To apply for the ratio method, you are required to inform the IRD of your intention to use this method before the beginning of the tax year. You must also be registered for GST, file one or two-monthly GST returns and have an income tax liability of below $150,000 for the previous year.

    To make a provisional tax estimate using the ratio method:

    • The IRD will work out your ratio percentage by dividing your residual income tax for the last tax year by your total GST taxable supplies for the same year.
    • When last years figures are unavailable, the IRD will base your ratio on your residual income tax and total GST taxable figures from the previous year.
    • Your provisional tax you the year is calculated by multiplying the ratio percentage by your GST taxable supplies for the previous two months.
    • When utilising the ratio method you will make provisional tax payments every two months (six times a year) alongside your GST returns.

    Note that the GST ratio method is not a commonly used method to calculate provisional tax, but it is available as an option.

X