Do I have to pay Provisional tax in NZ?

Provisional tax is payable in three instalments. For those with a standard (31 March) balance date, it is payable on 28 August (first instalment), 15 January (second instalment) and 7 May (third instalment).

Terminal tax is the excess tax liability, for the year, above the amount payable via uplift. For those who have a tax liability greater than $60k, any terminal tax is payable on 7 May. For those who have a tax liability less than $60k (commonly referred to as ‘safe harbour’), any terminal tax is payable on 7 February the following year (or, if you use a tax agent, 7 April the following year).

Broadly, under the ‘standard option’, it is calculated based on an ‘uplift’ of your prior year’s tax liability (increased by 5%).  If however you are yet to file your prior year’s tax return, your provisional tax liability is calculated based on an uplift of your tax liability from two years prior (increased by 10%).  Whilst it may sound straightforward, there are a few nuances as to how provisional tax is calculated.

If you file the prior year’s tax return before the first instalment (or if you do not use a tax agent), then the current year’s provisional tax obligation is simply based on the lesser of (payable in equal instalments across each of the three provisional tax instalment dates):

1. the current year’s tax liability, or
2. 105% of the prior year’s tax liability (with any terminal tax payable either at 7 May, 7 February or 7 April as applicable).

If you file the prior year’s tax return after the first instalment but before the second instalment date, the current year’s provisional tax obligation becomes a little more complicated, depending on the amounts of the tax liability of each of the current year, prior year, and two years prior.  This is where a good accountant can assist with calculating the amount of provisional tax payable at each instalment, as well as providing options for business cash flow to smoothen out the effects of lumpy cashflow and provisional tax instalment amounts.

If you file the prior year’s tax return at any time after the second instalment date, the current year’s provisional tax obligation is as follows:

1. the first and second instalment dates is the lesser of the current year’s tax liability, the prior year’s tax liability, and the tax liability from two years prior (with one third payable at each instalment date); and
2. the third instalment is the lesser of one third of the current year’s tax liability and 105% of the prior year’s tax liability (with any terminal tax payable either at 7 May, 7 February or 7 April as applicable).

Note: the calculation of provisional tax may be different if the standard option is not used, for those who are in their first year starting a business, or for those in a transitional year (i.e., when changing balance dates, whereby there may be more or less than three provisional tax instalment dates in a transitional year).

If there is a late or missed payment of provisional tax, the shortfall may attract interest and penalties.

Penalties are charged (on any underpayments) at a flat rate of 1% on the day after the due date for payment, and a flat rate 4% for remaining tax (including penalties) on the seventh day after the due date for payment.

Interest is charged on any underpayments either from:

1. the date after the due date for payment, if your tax liability is over $60k for the year, or
2. 7 February or 7 April (as applicable), if your tax liability is under $60k for the year (to the extent there are outstanding provisional tax amounts as at this date).

As at the date of this article, Inland Revenue’s interest rate for underpayments is 9.89% (this rate changes as market interest rates fluctuate).