Provisional tax is a system of paying income tax in New Zealand.
It applies to all individuals who earn income from self-employment, rental properties, investments, and other sources not subject to Pay As You Earn (PAYE) withholding.
In this blog, we will take a closer look at what provisional tax is, how it applies to everyone, and what you need to know to stay compliant.
What is Provisional Tax?
Provisional tax is a system of paying income tax in advance, based on an estimate of the income you will earn during the year. It is designed to help you spread your tax payments over the year and avoid a large tax bill at the end of the year. The amount of provisional tax you pay is based on an estimate of your total income for the year, less any allowable deductions.
How does Provisional Tax apply to everyone?
Provisional tax applies to everyone who earns income from self-employment, rental properties, investments, and other sources not subject to PAYE withholding. If you earn income from any of these sources, you are required to pay provisional tax. You will need to estimate your total income for the year, including any income earned from employment subject to PAYE, and deduct any allowable expenses.
If you earn more than $5,000 per year from self-employment or other sources, you will be required to pay provisional tax in instalments throughout the year. There are three provisional tax payment dates each year: 28 August, 15 January, and 7 May. The amount of each instalment is based on your estimated income for the year, less any tax credits and any tax paid in previous instalments.
What do you need to know to stay compliant?
To stay compliant with provisional tax requirements, it’s important to keep accurate records of all your income and expenses. You will need to estimate your total income for the year and make sure you have enough money set aside to pay your provisional tax instalments.
If your income fluctuates throughout the year, you may need to adjust your provisional tax instalments to reflect changes in your income. You can do this by estimating your income for the remaining instalments and contacting Inland Revenue to request a change.
It’s also important to file your tax returns on time and pay any tax owing by the due date. Failure to pay your provisional tax instalments or file your tax returns on time can result in penalties and interest charges.
In conclusion, provisional tax is a system of paying income tax in advance, based on an estimate of the income you will earn during the year. It applies to everyone who earns income from self-employment, rental properties, investments, and other sources not subject to PAYE withholding.
To stay compliant with provisional tax requirements, it’s important to keep accurate records, estimate your income, and file your tax returns and pay any tax owing on time. If you’re unsure about your provisional tax obligations, it’s always best to seek advice from us.
