A taxpayer has no obligation to pay provisional tax for the 2020-21 income year if their liability for the previous year was $5000 or less.
In most cases, any income tax payable for the upcoming year will be due at their terminal tax date. That said, there are some exceptions to this rule.
We are mentioning the increased provisional tax threshold because there appears to be confusion about how it works as we near 28 August 2020.
Background
Earlier this year, IRD announced that it was doubling the point at which someone enters the provisional tax regime.
Previously, someone became a provisional taxpayer if their income tax liability for the previous year was more than $2500. The threshold is now $5000.
This is a permanent change. It was designed to deliver a cashflow benefit to smaller taxpayers, particularly in the wake of COVID-19. Moreover, it was one of the recommendations in the Tax Working Group’s final report.
The new threshold applies for the 2020-21 income year onward.
The impact
Generally speaking, provisional tax payable for the year equals either:
- Last year’s income tax liability, plus five percent; or
- The income tax liability from two years ago, plus 10 percent (if last year’s return has yet to be filed). This mainly applies to those who have an accountant with an extension of time filing arrangement.
However, as a result of the increase to the threshold, a person who was previously paying provisional tax under the old threshold won’t have to pay provisional tax for the upcoming year if their income tax liability for the prior tax period(s) was $5000 or less.
IRD estimates that around 95,000 taxpayers will benefit from this change.
Example
Someone with a 31 March balance date has the following information for the past two income years. They filed their return for the 2019-20 income year on 7 July 2020.
| Income year | Income tax liability |
| 2018-19 | $3500 |
| 2019-20 | $4000 |
As you can see, this person had an obligation to pay provisional tax in the 2019-20 income year under the old threshold. That’s because their 2018-19 income tax liability was more than $2500.
However, because their 2019-20 income tax liability is less than $5000, there is no requirement to make provisional tax payments during the upcoming year.
Where is the income tax due and payable?
Using the facts above, and assuming the income tax bill for the 2020-21 income year is less than $60,000, then everything is due and payable at the taxpayer’s terminal tax date.
This is because they fall under the safe harbour interest threshold.
For many taxpayers, terminal tax for the 2020-21 income year will be due on either be 7 February 2022 or 7 April 2022. Check with your accountant if you are unsure.
IRD will only charge interest and late payment penalties from this date if a taxpayer has not paid what they owe by then.
However, please note the interest rules will work differently if the liability is $60,000 or more.
In that situation, a taxpayer should settle what they owe for 2020-21 income year on the date that would have been their final provisional tax instalment for that year. For those with a 31 March year-end, this payment will be due on 7 May 2021.
They will incur IRD interest from this date if they fail to pay their tax by then.
Different interest rules also apply for those in their first year of business who have an income tax liability of $60,000 or more.
These can be quite complex. The reason why is the interest start date is determined by the date someone started to derive income from their taxable activity.
Please contact us if you have any questions.