Provisional Tax Options 2018
Provisional tax is effectively a progress payment to ensure that tax is being paid by most taxpayers as they earn their income throughout the year. It is paid in instalments, the number of which can depend on your GST filing cycle. You become a provisional taxpayer when your Residual Income Tax (RIT = end-of-year income tax less any tax paid at source) is greater than $2,500.
There are 4 current methods available through IRD with a further option available through tax pooling:-
1. Standard – 5% uplift on prior year RIT
2. Estimation – taxpayer can request their own level based on anticipated profits or losses
3. GST ratio – an elected method which calculates provisional instalments based on reported GST income
4. Accounting Income Method (AIM) – this is the new option and requires activity statements are filed
5. Tax pooling – we use TMNZ to help bridge the gaps that sometimes appear in taxes due and paid but this can also be used for paying throughout the year.
We see AIM making the GST ratio method obsolete.
Whilst there will still be instances where Estimation is required these can largely be eliminated by using AIM.
The Standard uplift method will remain the most common for most individuals and businesses not able to, or not wanting to, adopt AIM.
AIM sounds fantastic as it seeks to pay provisional tax in line with profits and losses with the anticipated result of paying accurately and avoiding any large wash-up payments at year-end.
From 1 April 2017 there were significant changes to the interest and penalties regimes as they affect provisional tax.
· Safe harbour increased to $60k from $50k – no interest will be payable if RIT is less than $60k
· Safe harbour extended to non-individuals – so now trusts and companies can avoid interest if within the $60k threshold
· Interest removed from the first two provisional instalments for Standard uplift taxpayers – so now interest will only run from 7 May so long as you pay the first two payments as required.
So, for those of you not yet ready for AIM, we would suggest that you:-
· Set aside your tax as you earn your income
· Budget for your 2 or 3 provisional tax payments throughout the year
· Pay your first 2 provisional instalments in full and on time
· Get your accounts and tax returns drafted as soon as possible after the year end.
If you do that then you will significantly reduce your exposure to interest and penalties.