Provisional tax breaks up the income tax you pay Inland Revenue (IR). It is paid in multiple instalments instead of one large sum at the end of the year.

You may have to pay provisional tax if you earn income where tax hasn’t been deducted before you receive it. When your residual income tax (RIT) for the previous year was more than $5000, you will have provisional tax to pay. Residual income tax is the amount of unpaid income tax for the year minus any tax credits such as PAYE that you are entitled to.

Generally, you will pay provisional tax three times a year. For example, if you have a 31 March balance date (your end of financial year). In that case, your three provisional tax instalments are usually due on 28 August, 15 January, and 7 May.

These dates can change by a few days to avoid public holidays and weekends. They can also differ according to how you have calculated your RIT, so it’s best to check in with your accountant or myIR to confirm your payment dates. 

What if you miss your provisional tax payment?

When you file your income tax return and calculate your RIT for the year, you deduct the provisional tax you paid earlier. If you have paid more provisional tax than you owe, you will receive a refund from IR.

However, suppose you have underpaid your income tax for the year. In that case, you must pay the remaining balance or risk late payment penalties (LPP) and interest accruing on what you owe. IR interest is calculated daily on any outstanding amount that you owe. You can check the current interest rate here.

Don’t worry though, TMNZ can help. Read about our flexible ways of paying tax below.

Late payment penalties and interest

Penalties and interest on missed or underpaid tax may be charged as follows:

  • one percent the day after the payment was due.
  • an additional four percent if the tax amount (including LPP and accrued UOMI) remains unpaid after seven days.
  • UOMI may be charged from the day after the payment was due – UOMI will be charged daily until you have paid your total tax amount, including late payment penalties and any accrued interest.

Special IR interest rules under the Safe Harbour Provision

If you have used the standard uplift method to calculate your provisional tax:

  • and your RIT for the year is less than $60,000
  • and you pay all required provisional tax instalments on time and in full

Then you don’t have to worry about incurring IR interest if the tax you have paid during the year is less than your actual RIT total. This is because you fall under what’s known as the Safe Harbour Provision. Any final balance to settle your tax bill will be due by your terminal tax date. IR interest will only apply from your terminal tax date if you don’t pay your balance by then.

The rules work slightly differently if the actual RIT is $60,000 or more.

In that situation, if you have paid all your instalments on time and in full, you will incur IR interest on the remaining balance until you have paid in full. IR interest is calculated from your final instalment date for that year. 

Flexible ways to pay your provisional tax

With an IR-approved tax pooling provider, like TMNZ, you can smooth out your tax payments up to 75 days after your terminal tax date, so you have up to 22 months longer to pay your tax bill.

With TMNZ Flexitax, you can smooth out your payments to match your business cashflow. There is no up-front payment, and as long as you settle your arrangement by the date TMNZ provides, your IR account will show as paid on time. Meaning you’ll never have to worry about LPP or high interest rates again (ours are extremely competitive). And of course, it’s all tax deductable.

If you know when you’ll have the funds to pay your tax, you can also delay your payment and move to a date in the future using Tax Finance. With Tax Finance, you can look ahead and match your tax payments to seasonal highs. Meaning you can avoid things that have the power to set you and your business back – like bank overdrafts and loans. 

With Tax Finance, you choose a date or dates in the future when you know you can pay your tax. You’ll lock in a competitive interest rate that you pay upfront. You can rest easy knowing that as long as you settle the arrangement by the date TMNZ provides, your tax will show as paid on time with IR. No late payment penalties, and you will have saved considerably on interest.

Better for your cashflow, better for your business.

What if I’ve missed my provisional tax payment?

TMNZ can help to wipe late payment penalties and reduce your interest cost if you have underpaid or missed your provisional tax. Contact your accountant or tax agent and let them know you want to pay your missed or underpaid provisional tax using TMNZ tax pooling. Or get in touch to see how we can help.

As always, we recommend you speak to your accountant with any questions.

 

Information correct as at 15/07/2024