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 tax liability (called their 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 new business taxpayers.

First year of trading: RIT is less than $60,000

If a taxpayer’s residual income tax (RIT) is less than $60,000 in their first year of trading, they won’t need to pay provisional tax that year. Instead, tax is payable as a lump sum on their terminal tax date, which for most taxpayers will be 7 February or 7 April of the year after this tax year.   

Use of money interest and late payment penalties will be incurred if their tax bill isn’t paid by the due date.

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) will charge interest if taxpayers fall into the ‘new provisional taxpayer’ category and you don’t make provisional tax payments.

The new provisional taxpayer criteria are different for individuals and companies/trusts.

An individual qualifies as 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.

A company or trust qualifies as 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.

When is the first provisional tax payment due?

Inland Revenue will charge interest (see the current rate here) on the number of provisional tax payments a taxpayer could have made in their first year of business if they 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:

These dates will differ if your balance date isn’t 31 March or if you file GST returns on a six-monthly basis.

First provisional tax payment – The basic amount

So, what happens if you meet the new provisional taxpayer criteria in your first year of trading?

Well, put simply, Inland Revenue will divide your tax liability (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 payment dates: 15 January and 7 May. The amount on which interest will accrue at each due date will be $34,500.

Reducing exposure to Inland Revenue interest

Taxpayers may wish to pay provisional tax in their first year of trading to mitigate their exposure to IR interest if they expect their RIT 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 6.3%. This is provided they make voluntary payments before their tax date and haven’t been obligated to pay provisional tax in the current or previous four years.

Reduce IRD Interest with TMNZ

Worried about use of money interest on your first year tax bill? 

If you have missed making a provisional tax payment, or wish to delay when you make the provisional tax payment, TMNZ can help. TMNZ can delay the payment of your provisional tax, or help you with any missed payments. The interest cost to you is well below Inland Revenue’s interest rate. Talk with TMNZ to stay on top of your tax obligations without the stress.

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.