Provisional Tax – how does it work?

Provisional Tax – how does it work? 

If you had to pay tax of more than $5,000 in your last income tax return, you may have to pay provisional tax for the following year. Provisional tax is like paying progress payments on next year’s income tax.

The amount you have to pay relates to your expected profit for the year. In practical terms, the amount of provisional tax you’re expected to pay is based on the tax you were liable for in the previous year, often referred to as residual income tax (RIT).

Even if you are not required to pay provisional tax, you may still elect to do so, to spread your tax obligations over the year. This can help you manage cash flow and take away the pressure of paying a lump sum at the end of the year.

For a new business, the first-year provisional tax payment can be tough. You must pay last year’s income tax at the same time as the first instalment of next year’s provisional tax. There are a couple of ways we can help you reduce the pain.

If you are self-employed or a partner in a partnership you may be entitled to a discount of 6.7% on your first year’s income tax. This is to encourage you to pay tax early and relieve the financial strain before you must pay provisional tax for the first time.

COVID-19 and provisional tax

In order to shrink compliance costs for smaller taxpayers and allow them to retain cash for longer, the government has introduced some tax relief measures that affect the normal rules for provisional tax:

  • The threshold for provisional tax increased from $2,500 to $5,000 from the 2020/21 tax year. This means any current provisional taxpayers with provisional tax payments of less than $5,000 will have until 7 February following the year they file to pay their tax bill.
  • Depreciation for commercial and industrial buildings is reintroduced from the 2021/22 income year. If you are a building owner, you will be able to adjust provisional tax payments immediately in anticipation of additional deductions that become available.
  • If your business is affected by COVID-19 and:
    • you need to re-estimate your provisional tax as your income falls short of the estimate and provisional tax has been overpaid, it may be possible to arrange early refunds.
    • if you are unable to pay tax by the due date, Inland Revenue has discretion to write-off penalties and interest. You may be eligible for a UOMI (use of money interest) write off.

It’s important to keep your tax plan current. If circumstances change for your business, we need to adjust your plan. Let us know as soon as you can about the situation for your business.

Please ensure you check with your Accountant regarding the information above – they are best to advise you on this.

Are you floundering when it comes to managing the books?

Are you floundering when it comes to managing the books? Struggling to get your head around all the rules and regulations? Relationship with your accountant or bookkeeper not that flash? Then buckle up for your financial literacy check-up. 

New Zealand is one of the easiest places in the world to go into business – with just a few clicks of the mouse you can be up and running. No training, no specialised knowledge, no great investment, no worries.

It’s almost too easy. And that can be dangerous.

Lisa Martin, executive director and founder of accounting and bookkeeping specialists GoFi8ure, is a trained accountant with a Bachelor of Business (Accounting) and knows of at least two university papers that would benefit business owners just starting out.

You can read the article by CLICKING HERE. 

How do you collect your debtors faster?

Did you know that you still have to pay tax on your debtors, even if you haven’t yet collected them? So, how do you collect your debtors faster?

– Agree your payment terms at the time of sale.
– Ensure your customer signs your Terms of Trade before you start the job.
– Include a guarantee in your payment terms.
– Invoice as quickly as you can.
– Ask for a deposit prior to starting the job.
– Change your payment terms to within 7 days of invoice or on delivery.
– Send statements with only two columns – current and OVERDUE.
– Follow up the day after the due date.
– Have someone other than the owner be responsible for collection of debtors (owners are usually too soft!).
– Document any changes to your standard payment terms in writing.
– Use a debt collector sooner rather than later – the longer you leave it, the harder it is to collect.
– Don’t provide credit to customers who’ve been late payers in the past, and don’t offer more credit to customers with outstanding payments.

“It’s the squeaky wheel that gets the oil.” – Anon

Need help developing your Debtor Management Policy? We can help… get in touch!