Increased provisional tax threshold: Legislative application

The rules that determine whether someone must pay provisional tax are still the same in terms of how IRD applies them.

However, what’s not the same for the 2021 and future tax years is the point at which they are applicable to a taxpayer.

That’s the important thing to remember if you’re struggling to wrap your head around how the increase to the provisional tax threshold works. (Don't worry, you're not the only one given the number of questions TMNZ has fielded recently from accountants in relation to this topic.)

Indeed, the legislation regarding whether a taxpayer has an obligation to pay provisional tax – particularly the rules found in sections RC3, RC6, RC9, RC13 and RC14 Income Tax 2007 – is essentially read and applied by IRD in the same manner it was before this change happened, albeit residual income tax (RIT) of $2500 has now been replaced with RIT of $5000.

That’s it. Nothing else is different.

To illustrate that point, let's look in more detail at how the provisional tax threshold increase impacts the 2021 tax year.

How it works in practice

Under the standard uplift method, provisional tax for the upcoming year is based on either:

  • The RIT for the 2020 tax year uplifted by 105 percent (CY-1); or
  • The RIT for the 2019 tax year uplifted by 110 percent (CY-2) if the 2020 tax return has not been filed and doesn't need to be until 31 March 2021.

If a taxpayer is basing an instalment for the 2021 year on CY-1 – or CY-2 if they have yet to file CY-1 – and the RIT in the return that is being used to work out what is due and payable at that point in time is $5000 or less, then they will have no obligation to pay provisional tax at that particular instalment date.

It does not matter one iota if, during the prior year that is being used for the uplift calculation, they were a provisional taxpayer due to their RIT in that year exceeding the old threshold of $2500.

The new threshold is all that matters.


Meet Karen. She is a taxpayer with a 31 March balance date who has used the standard uplift method to calculate her provisional tax for the past two years.

She has the following RIT and filing date information.

Tax Year RIT Date tax return was filed
2019 $4500 31 March 2020
2020 $35,000 Yet to file

Her accountant has an extension of time arrangement with IRD and tells her he won’t be filing her 2020 tax return for at least another six months. As such, he is going to use her 2019 RIT as the basis to work out her first payment for the upcoming year.

Karen’s first provisional tax instalment for the 2021 tax year is due on 28 August 2020 (P1).

However, because her RIT for the 2019 tax year was $5000 or less, she won't have to make a payment at P1. The uplift amount due and payable will be $0.

The fact she was a provisional taxpayer during the 2019 tax year, albeit under the old threshold, means nothing.

If Karen gets to 15 January 2021, the date of her second provisional tax instalment (P2), and her accountant has still not filed her 2020 tax return, then she will not have to make a payment at P2 either. Again, the uplift amount due and payable will be $0.

Only when her accountant files the 2020 tax return will she become a provisional taxpayer. This is because the RIT for that year exceeds the $5000 threshold.

Karen’s accountant must legally file the 2020 tax return by 31 March 2021.

Assuming this is the date they intend to file the previous year’s return, then she will need to pay something at 7 May 2021 (P3).

What is the amount she should pay P3?

That's a good question. What Karen should pay at P3 really depends on how her 2021 tax year unfolds.

It will be ONE of the following:

  • Nothing – if the 2021 RIT is going to be 5000 or less. This is because Karen is not a provisional taxpayer under section RC3 (1) Income Tax Act 2007 for that year. Any income tax she does owe for 2021 tax year will be due and payable at her terminal tax date because she meets the safe harbour interest concession rules found in section 120KE (1) and (2) Tax Administration Act 1994.
  • The 2020 RIT uplifted by 105 percent – if she thinks the 2021 liability will be less than $60,000. Any remaining balance to settle what she owes for the 2021 tax year will be due and payable at her terminal tax date, again because she meets the safe harbour interest concession rules mentioned above.
  • The expected 2021 RIT – if Karen expects this to be $60,000 or more. This is because she would fall out of safe harbour and into the rules found in section 120KBB Tax Administration Act 1994. These rules see someone who pays the uplift amount on time and in full at P1 and P2 only incur IRD interest from P3 if they have not settled their liability for the year in full by this date.
  • The expected 2021 RIT – if Karen expects this to be LESS THAN the uplifted 2020 RIT. Again, the interest rules in section 120KBB will apply if what she pays at P3 turns out not to be enough to settle the actual liability for the year.

Please contact us if you have any questions about the increase to the provisional tax threshold.

We're happy to help.

Increased provisional tax threshold explained

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.


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.


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.