What is Provisional Tax?
When you first go into business in New Zealand, you don’t actually have to hand over any income tax to IRD for quite some time (unless you are going to be earning over $208K in profit for your first year – then different rules apply).
So say your first financial year will end at the 31 March 2020 – then your financial accounts and returns are prepared and any income tax payable for that year is due to Inland Revenue by the 7 April 2021 (the following year or 7 February if you don’t have a tax agent) – so you can effectively get up to 24 months trading before you have to pay your first years tax to IRD. This tax is called Terminal Tax.
However in your second year of trading – eg from 1 April 2020 to 31 March 2021 – you may need to pay provisional tax. If your first terminal tax to pay is over $2,500 then provisional tax is triggered – this means you have to pay income tax for your second year of business in the second year – not a year later. It’s like paying as you go rather than paying in arrears. Inland Revenue take the terminal tax figure and add 5% to it – this is your provisional tax amount to pay – and is usually due in 3 instalments during your second year.
When your financial accounts and tax returns are prepared for 31 March 2021 – all that provisional tax you’ve paid will be sitting as a credit against your name to offset your final tax bill for the year. Any overpayment will be refunded to you, any underpayment will become your terminal tax and will be payable by 7 April 2022.