Provisional tax and you: this year

Further changes to provisional tax will be coming next year, starting 1 April 2018. But what does it mean for you this year? For provisional taxpayers who pay using the standard method, there are two changes to the way IRD will charge UOMI from the 2018 tax year.

The first change applies to smaller taxpayers (including companies and trusts) using what’s called the ‘safe harbour’.

It’s good news for you if:

  • Your income tax liability is less than $60,000; and
  • You pay the tax required according to the standard method at your three provisional tax dates for the year.
    In this case, the IRD will not charge interest if it turns out you did not pay enough provisional tax, as long as you pay any final balance by your terminal tax date.

The second change applies to other taxpayers
If your tax liability is $60,000 or more, and you have paid provisional tax for the year based on the standard method, then:

  • IRD won’t charge interest if you paid tax due according to the standard method at your first and second provisional tax dates, even if your actual liability is higher.
  • The final balance will be due at your third provisional tax date. IRD interest applies on any underpayment of tax from the third provisional tax date.

If you pay using the standard method
It’s important you pay the uplift amount on the provisional tax dates required or you’ll run the risk of incurring UOMI. IRD will charge UOMI on the uplift amount or a third of the actual liability, whichever is the lower amount. Late payment penalties will also apply if payment is not made on time.

Provisional tax amounts may be substantial and hard to manage. In addition, you may not know your taxable profit for the year until months after balance date. If your income is seasonal and difficult to forecast, or you have an unexpectedly profitable transaction or contract, you could end up owing IRD an amount you’ll struggle to pay.

Choose the right payment method
Volatile or seasonal income means you may prefer to use the estimation or GST ratio methods to calculate your payments – in which case you will be subject to the same provisional tax rules as before.

The new pay-as-you-earn option, the accounting income method, which IRD hopes will address those issues, is not available until 1 April next year (to coincide with the start of the 2019 tax year).

Until then, it is important to talk to us if you are going to have trouble meeting your provisional tax obligations. We can work with you to devise a plan and discuss options like the use of Tax Management NZ to mitigate your risk if you cannot pay on time or in full.

Whatever your tax challenge, we can help.

The Accounting Income Method – no more guesswork with provisional tax

Many business owners find calculating and paying provisional tax one of the most difficult areas of compliance. So any opportunity to simplify this has to be welcome.
The accounting income method is a grand name for a simple but smart change. It allows you to use your accounting software to calculate and pay your provisional tax, taking the guesswork out of the process. If that sounds a lot like how you calculate PAYE, that’s because it is. Although these changes don’t take effect until April 2018, now is a good time to start planning for them. We’ll look deeper into this in future issues, so watch this space.

Other business-friendly measures include reducing or removing UOMI for the vast majority of business taxpayers. In the past UOMI has been seen as unfair, because even if a business paid the correct amount of provisional tax during the year it could still incur the interest. As of April 1 this year, this charge is considerably reduced through the extension of the safe harbour rules.

In addition, there are new rates for UOMI. As from 8 May, they have changed to:

  • Underpayments – 8.22% (down from 8.27%). That’s what you pay on money you owe to IRD.
  • Overpayments – 1.02% (down from 1.62%). That’s what IRD pays you on money it owes to you.

The rates are reviewed regularly to reflect market interest rates.

The combination of the accounting income method and the other provisional tax changes will reduce the impact UOMI has on small businesses. The changes also remove the one per cent incremental late payment penalty for new GST, income tax, and overpaid Working for Families tax credits.
If you’d like more information about these changes, or how they could benefit you, get in touch with us and we’ll be happy to walk you through them.