Guide: Calculating provisional tax

The uplift method is the default for calculating provisional tax. This guide is to help you know what your obligations are so that you know what to pay, when to pay and avoid IR use of money interest.

This guide has been updated to reflect legislative changes made due to Covid-19.

This guide will help you with...

  • Calculating
  • Filing
  • Safe harbour
  • First year in business

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Current version available for download: October 2022
Previously published version(s): August 2019, February 2019, February 2020, April 2020

About this guide

Need some help regarding provisional tax and the use of the standard uplift method?

Tax Management New Zealand (TMNZ) 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 this guide has since been updated to reflect the provisional tax amendments contained up to and including the Taxation (Annual Rates for 2021-22, GST, and Remedial Matters) Act 2022. Therefore, it is based on our interpretation of the legislation as at 30 March 2022 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.

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.

Note: 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.

Different methods for calculating provisional tax

If your income tax (RIT) bill was more than $5,000, 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.