IRD requires provisional tax to be paid when a tax payer has residual income tax (RIT) greater than $5,000. Provisional tax is based on 105% of the prior year earnings, or 110% of the year before that if the prior year income tax return has not been filed.

As an example:
A Company has annual profit of $100,000 for the year ended 31 March 2022.
Tax at 28% would be $28,000.

For the 2023 income year (1 April 2022 – 31 March 2023), it will be required to pay provisional tax of $29,400 ($28,000 x 105%).

If paid in 3 instalments this would be paid as follows:
28 August 2022 $9,800
15 January 2023 $9,800
7 May 2023 $9,800

If the Company has an increase in profit, to say $250,000, for the 2023 income year its actual annual tax payable will be $70,000 ($250,000 x 28%).

As the provisional tax paid ($29,400) is less than the actual calculated tax based on earnings ($70,000) the Company will have Terminal Tax to pay of $40,600. Note that:

- The Terminal Tax is not payable to the IRD until 7 April of the following year (13 months after the income has been earned). Businesses should ensure they set adequate funds aside so that tax payments can be made when they fall due.

- Where the annual tax is greater than $60,000 IRD will charge Use of Money Interest (UOMI) from 7 May until it is paid (in this example if not paid until 7 April 2024 UOMI would be calculated at 7.28% for 11 months)

- With an increase in the profit for the 2023 income year, the provisional tax payments from August 2023 will also increase (to 105% of 2023 earnings)

For your specific situation, if you would like to get a better understanding of whether provisional tax paid will be enough to cover the actual tax for the year, please get in touch. We can also confirm how much you should be setting aside each month/quarter so that you have sufficient funds available for tax when it is payable.

Friday, 14th October 2022

"As a real estate salesperson operating in Hamilton, I have found it vital to have a great accountant. Not content with selling just the occasional property, I have been single-minded about operating an efficient, healthy and growing business. This has meant performing at high levels while providing outstanding service to every client. To help me achieve this, I have invested in building a team of support staff. We see DB Chartered Accountants as an integral part of our team as they are a “one stop shop” looking after all the book-keeping aspects of the business.

DB Chartered Accountants take care of all my tax and reporting requirements, from GST, KiwiSaver contributions and PAYE to end of year financials and taxation advice. A lot of my business growth now revolves around time management. By working with DB Chartered Accountants my time input into the accounting side of the business is now negligible, leaving me free to work on my core business rather than be bogged down by the “red tape” aspects.

I enjoy working with the firm and am known by name by most of the staff which gives me confidence that I am being properly looked after. I appreciate being able to pick up the phone and call when I have questions. I would recommend working with DB Chartered Accountants without hesitation."

Vaughan Heslop,
Lodge Real Estate MREINZ
REINZ Top 10 Regional Salesperson Award Winner
Waikato/Bay of Plenty/Taupo Districts
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