Articles by Anna Loginova.
For many of our clients, the most confusing and most-often discussed type of tax is provisional tax. (For background on the different types of tax that we have to deal with on a regular basis, have a look at our March 2022 blog.)
What is provisional tax?
Provisional tax is the prepayment of income tax in instalments during the year. It can be challenging, as it involves a degree of foresight (i.e. figuring out how much the business going to earn in advance), compared with other types of tax which are based on what the business has already earned.
The provisional instalments due dates are 28 August, 15 January and 7 May, based on a standard balance date of 31 March. (These dates can be different if the balance date is not 31 March, or if the GST registration periods are monthly or 6-monthly. If you are not sure, talk to your accountant.)
How is provisional tax calculated?
The standard method the IRD uses to calculate how much provisional tax you need to pay is to add 5% uplift to the residual income tax for the prior year. (There is an example that illustrates this in the March 2022 blog.)
If the income tax return is not filed or calculated for the prior income tax year, then the IRD uses the most recently filed tax return, being the tax return filed two years ago, and adds a 10% uplift.
Using the same figures and tax years as those in the March 2022 blog example, the calculation in this case is as follows:
2021 residual tax to pay was $32,665
Provisional tax for 2023 is $32,665 plus 10% = $35,931.50
Therefore the 2023 provisional tax instalments would be:
•1st Instalment: 28th August 2023 of $11,977.16
•2nd Instalment: 15th January 2023 of $11,977.16
•3rd Instalment: 7th May 2023 of $11,977.16
What if business growth doesn’t align with IRD’s calculations?
The standard IRD calculation is effective from a cashflow point of view if a 5% annual uplift is in line with business growth.
But what if the business fluctuates from year to year? (Remember, if you miscalculate and underpay your provisional tax, the IRD will charge you use of money interest.) What if cashflow is tight or needs to be managed carefully?
Please get in touch with your GRA Client Services Manager and we will be able to provide you with some options and calculations in relation to this. And do this soon, as the next 2025 provisional tax instalment is due on 15 January 2025.
If you are not already a client, you can request a meeting to see how we can assist (the first meeting is free for new clients).
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