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.

Tuesday, 17th October 2023

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