PAY TAX
Provisional Tax Explained
As your profits grow, provisional tax becomes part of the picture. Here’s what it is, how it works, and what to do if the numbers don’t look right.
What Is Provisional Tax in New Zealand and Do I Need to Pay It?
When you were starting out, there probably wasn’t much tax to pay because you weren’t making much money. As your revenue grows, that changes — and provisional tax is how IRD manages that.
What is provisional tax?
Provisional tax is essentially paying your income tax in instalments throughout the year, rather than in one lump sum at year end. IRD calculates an amount based on your previous year’s tax, and you pay it in two or three instalments during the year.
The logic is straightforward: IRD doesn’t want businesses to reach year end with no money left to pay their tax bill. Provisional tax spreads the cost and reduces the risk of that happening.
What if the amount seems wrong?
If your business has had a different year to the one IRD is basing their estimate on, there are options. You can provide a revised estimate based on your current financials, or use Tax Pooling to adjust the timing of payments.
These options exist, but they need to be managed carefully. Get in touch if you want to work through the best approach for your situation.