With another Year End fast approaching, our thoughts inevitably turn to Tax. No one loves the dreaded T word, but Tax isn’t a bad thing (no, really!). Owing Tax means your business has made a healthy profit, and that’s something to celebrate!
Whilst we all love to hate the Tax man, it is a necessary evil for all of us, and IRD have a number of ways to make paying tax a little less painful. The first one being Provisional Tax.
What is Provisional Tax?
Provisional tax helps you manage your income tax. Provisional Tax is basically a way of paying your income tax in instalments during the year, instead of a lump sum at the end of the year.
There are 4 options available for working out your provisional tax.
The standard option is based on your previous year’s residual income tax (RIT) plus 5%. It’s useful if your income is steady or increases over the next year.
The estimation option can help you avoid overpaying or underpaying your provisional tax. It may be right for you if you already pay provisional tax and:
· your income will decrease over the next year
· you have a loss which can be offset against your income
· your income will increase a lot and your residual income tax (RIT) will be more than $60,000 higher than what the standard option has calculated
· you’ve gone from untaxed income like self-employment, where you must pay your own tax, to salary or wages where your tax is already deducted before you’re paid.
The accounting income method (AIM) is available to individuals and companies with a yearly turnover under $5 million.
Using AIM will suit your business if:
· your business is growing
· you're new to business
· your income has reduced significantly since last year and is hard to estimate
· you have irregular or seasonal income
· it's hard to forecast your income accurately
Mandy is our resident AIM expert, and will be sharing more on the benefits of aim over the coming months.
The ratio option lets you match your provisional tax payments with your business cashflow. It also bases your provisional tax payments on a percentage of your GST-taxable supplies. But there are some strict criteria you must meet to be able to use this method.
Provisional Tax Increase
Also, did you know that the Provisional tax threshold has been increased from $2500 to $5000?
That’s right! Some good tax news :) In light of COVID-19 the government increased the provisional tax threshold from $2,500 to $5,000. This means if you have residual income tax for the financial year ended 31st March 2020 that is less than $5,000, you don't have to pay anything until 7 February (or 7th April if you have a tax agent) the following year.
Get in touch!
Book an appointment to come and have a chat with us if you have any questions about Provisional Tax and what method might be best for you and your business.
