Provisional Tax

Provisional tax is not a separate tax but a way of paying your income tax as the income is received through the year. You pay instalments of income tax during the year, based on what you expect your tax bill to be. The amount of provisional tax you pay is then deducted from your tax bill at the end of the year.

If you're residual income tax (RIT) is $2,500 or more you will have to pay provisional tax for the following year. Residual income tax is basically the tax to pay after subtracting any rebates you are eligible for and any tax credits (excluding provisional tax). Residual income tax is clearly labelled in the tax calculation in your tax return.

There are two options for working out your provisional tax: standard and estimation.

Standard option

The IRD automatically charges provisional tax using the standard option unless you choose the estimation option. Under this option:

  • Your provisional tax payable is your previous year's residual income tax.

  • Change in the tax rates may have an effect on the calculation of your provisional tax.

  • If your RIT is $50,000 or more in most cases the Estimate Method is the best to use. The IRD charge interest if your RIT is over $50,000 and insufficient Provisional Tax is paid.

  • Interest is payable on Company and Trusts if insufficient Provisional Tax is paid.

Estimation option

The other way to work out your provisional tax is to estimate what your residual income tax will be. When working out the tax, keep the following points in mind.

  • To get the right tax rate

    • add up all your estimated income

    • work out the tax on the total

    • then subtract any tax credits (like PAYE).

  • Using the estimation option, if your estimated residual income tax is lower than your actual residual income tax for that year, you may be liable for interest on the underpaid amount.

  • You can estimate your provisional tax as many times as necessary up until your last installment date. Each estimate must be fair and reasonable.

Interest

In some circumstances you may be charged interest if the provisional tax you paid is less than your residual income tax. If the provisional tax you pay is more than your residual income tax, the IRD may pay you interest on the difference.