Provisional Tax

If your income tax bill (residual income tax) is $2,500 or more, you are required to pay provisional tax in the following year.  This is not an additional tax but rather a means of paying your tax as you earn it.  The amount of provisional tax you pay during the year is then deducted from your final tax bill leaving you with either a further payment to make or a tax refund depending on the size of your final tax bill.

There are three options to work out your provisional tax:-

v  Standard;

v  Estimation;

v  Ratio  method.

Standardthe Inland Revenue Department (IRD) automatically charges provisional tax unless you choose one of the other options.  They will take your residual income tax and make an adjustment as follows:-

v  For the 2010 year, residual income tax is reduced by $730;

v  From 2011, an additional 5% will be added to your previous year’s residual income tax.

Estimation  - Under this option you can choose to estimate how much your income will be for the year and base your provisional tax payments on the amount of tax you will be due to pay.  However, if you use this method and underestimate the amount of tax you are due to pay, the IRD may charge you interest on the underpaid amount.  You can adjust the estimated amount prior to each payment as long as each estimate is fair and reasonable.

Ratio – If you are registered for GST you can pay your provisional tax payments at the same time as your GST payments.  You can use this option if:-

v  You were registered for GST all the previous tax year;

v  Your residual income tax for the previous year was over $2,500 and up to $150,000;

v  You file your GST returns either monthly or two monthly;

v  You are not operating a partnership;

v  Your ration percentage that the IRD calculated for you is between 0% and 100%.

 If you are unsure which options is best for you, give us a call or refer to the IRD website.

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