What is provisional tax
Provisional tax is not a separate tax but a way of managing your income tax by paying compulsory instalments during the year.
- The number of instalments you are required to make depends on the way you choose to calculate your provisional tax instalments. If you're GST-registered, how often you file GST returns also determines how many provisional tax instalments you're required to make.
- The amount of provisional tax you need to pay is based on your expected profit for the year or your GST taxable supplies (sales) and depends on the way you choose to work out your provisional tax instalments.
- At the end of the year you pay or are refunded the difference between the amount of provisional tax you paid and the amount you should have paid, based on your actual profit for the year.
If your residual income tax is $2,500 or more you will have to pay provisional tax for the following year. Residual income tax (RIT) is the amount of tax you have to pay, less any tax credits you may be entitled to (excluding working for families tax credits or other tax payments made during the year) and any PAYE deducted.
Calculating your provisional tax
You can use one of these options to work out your provisional tax:
- standard
- estimation
- ratio option.
The ratio option can only be used if you're registered for GST.
Standard option
The IRD automatically charges provisional tax using the standard option unless you choose the estimation option.
For individuals
- 2009 provisional tax (instalments payable on or after 1 April 2009), and
- 2010 provisional tax (all instalments)
your provisional tax is based on the previous tax year's residual income tax.
To calculate your provisional tax for 2011 and beyond, add 5% to the previous tax year's residual income tax, or 10% to the residual income tax from two years previous. You will only be liable for provisional tax if this figure is greater than $2,500. Your provisional tax is then paid in two or three equal instalments during the year.
There has been a change in the rates of personal income tax from the 2010 tax year. The change in tax rates affects how you calculate your provisional tax instalments. The standard option of calculating provisional tax for the 2010 year is the residual income tax (RIT) for the immediately preceding income year minus $730. You will only be liable for provisional tax for the tax year ending 31 March 2010 if this figure is greater than $2,500.
| Year for provisional tax being calculated |
Year of RIT amount used |
Adjustment |
| 2009 (instalments payable on or after 1 April 2009) |
2007 |
RIT - $730 + 5% |
| 2008 |
RIT - $730 |
| 2010 |
2008 |
RIT - $1,460 + 5% |
| 2009 |
RIT - $730 |
| 2011 |
2009 (back to original calculation) |
RIT + 10% |
| 2010 (back to original calculation) |
RIT + 5% |
For companies and those taxed as companies
Change in the tax rates may affect the calculation of your provisional tax if your business's income is taxed at the company rate.
When you calculate payments for the 2009 income year (for instalments payable on or after 1 April 2009 only) based on your income from the 2008 income year, use 90% of your RIT.
When you calculate payments for the 2010 income year (for all instalments) based on your income from the 2009 income year, use 100% of your RIT. You will only be liable for provisional tax if this figure is greater than $2,500. This ensures you do not overpay your provisional tax due to the 2009 change of company tax rate (See key messages about the 2009 change of company tax rate).
| Year for provisional tax being calculated |
Year of RIT amount used |
Adjustment |
| 2009 |
2007 |
95% of RIT |
| 2008 |
90% of RIT |
| 2010 |
2008 |
95% of RIT |
| 2009 |
RIT (no adjustment) |
| 2011 |
Two years previous |
RIT + 10% |
| Previous years |
RIT + 5% |
For other non-individuals not taxed as a company (eg, trusts or estates)
| Year for provisional tax being calculated |
Year of RIT amount used |
Adjustment |
| 2009 |
2007 |
RIT + 5% |
| 2008 |
RIT (no adjustment) |
| 2010 |
2008 |
RIT + 5% |
| 2009 |
RIT (no adjustment) |
| 2011 |
Two years previous |
RIT + 10% |
| Previous years |
RIT + 5% |
Estimation option
To work out your provisional tax, you need to estimate your RIT. When working out your income tax, please note:
- Under the estimation option, your provisional tax is paid in two or three equal instalments during the year (the same as the standard option).
- You will only be liable for provisional tax if this figure is greater than $2,500.
- To get the right tax rate:
- add up all your estimated income
- work out the tax on the total using the correct tax rate
- then subtract any tax credits (like PAYE).
- If your estimated RIT is lower than your actual RIT for that year, you'll be liable for interest on the underpaid amount.
- You can estimate your provisional tax as many times as necessary up to and including your last instalment date. Each estimate must be fair and reasonable.
- For individuals and unincorporated clubs or societies that are taxed at the individual rate you may use the following tax rates for calculating your 2010 tax year estimation:
| Income range |
Annual tax rate applied |
| $0 to $14,000 |
12.5% |
| $14,001 to $48,000 |
21% |
| $48,001 - $70,000 |
33% |
| $70,001 and up |
38% |
Ratio option
You pay provisional tax based on your GST taxable supplies for each two-month period. You'll make six provisional tax payments of differing amounts depending on your taxable supplies during each two-month period.
IRD calculate your ratio percentage and you multiply this by your previous two months GST taxable supplies to get the amount of provisional tax you need to pay.
Interest
In some circumstances you may be charged interest if the provisional tax you paid is less than your residual income tax. If the provisional tax you pay is more than your residual income tax, the IRD may pay you interest on the difference. |
