As chartered accountants few experiences are less enjoyable than provisional tax time.
As chartered accountants few experiences are less enjoyable than provisional tax time. For those unfamiliar with the current system, it involves significant guestimates of future taxes before full year results are known. The current system also slams underpayers with interest and sometimes penalties while paying around 1% interest to those that overpay, all while claiming that the IRD “is not a bank”.
In response to feedback, the government made the following changes to the provisional tax system which will start taking effect from 1 April 2017. For many the changes will start to take effect at the next provisional instalment date on 28 August 2017 relating to tax payable for the 2018 tax year.
Increasing Interest Thresholds
The past provisional tax system charged interest to those who had a tax bill of over $50,000 for individuals or $2,500 for companies and trusts. This threshold has now been increased to $60,000 for all tax payers as long as the standard amount of tax is paid by each due date. This will mean that as long as you pay the standard amounts by the due dates and have under $60,000 total tax payable you won’t be charged interest.
The changes also mean that no interest will be charged on the first 2 provisional tax dates (usually 28 August and 15 January) if the standard amount of provisional tax is paid on these dates instead of from each provisional tax date. Therefore, if these amounts are not enough to cover your final tax bill and the
total tax to pay is more than $60,000, the IRD will only charge interest from the final May 7 payment. By which time you should have a fair idea of the expected profit. This will save you time estimating the amount to pay, as well as interest should you get it wrong.
New Calculation Method
Many businesses operate on some form of cloud based software and therefore have a reasonable idea of their profit throughout the year. As such, the Government has introduced a new calculation method dubbed the “Accounting Income Method”. This method will be available from 1 April 2018 for the 2019 income year.
Using this method, each time a GST return is filed (or twice a year if not GST registered), interim financial information is also filed with IRD and, based on this information, provisional tax is calculated. When the end of year tax return is finalised, a washup amount of tax is payable at the terminal tax date with no interest charged. While attractive at first glance there are some fishhooks that may make this unattractive to some taxpayers.
The Accounting Income Method relies on reliable coding throughout the year with minimal year-end adjustments. To avoid this being taken advantage of the IRD will charge a 20% penalty to anyone they consider have not taken “reasonable care”. How aggressively the IRD will charge these penalties is unclear. Those with multiple entities doing transactions with each other should be particularly wary of using this method.
As provisional tax payable using this method is based on year to date income, those with income concentrated at the start of the year will have large tax bills at the start of the year. This may unnecessarily stress cashflow whereas using another method to delay payment may be more appropriate.
While the changes are positive overall, giving everyone more choice and flexibility in managing their tax payments, there are still many pitfalls and traps. There are a number of options available to navigate this new world of provisional tax.
To ensure you don’t get bit in the proverbial by provisional tax pain please contact Q2 Ltd before making any decisions about paying provisional tax.
Call 09 222 448 or email email@example.com to book a free consultation