Provisional and Terminal tax
Taxpayers who earn income that does not have tax deducted at source may be required to pay provisional tax if they meet the requirements set out in s RC3. Provisional tax payers’ tax liabilities are based on an estimate of the amount of tax that will be payable by the taxpayer for the year. At the end of the year, if a taxpayer’s actual tax liability exceeds the amount provisional tax paid, he has to make a further payment. Otherwise he can get a refund.
In other words, provisional tax is a way of paying income tax throughout the year.
Residual income tax (s YA1)
Residual income tax means the positive amount that remains after subtracting from the person’s income tax liability, the following credits:
- Tax paid by a trustee for a beneficiary;
- Tax paid by an agent;
- Attributed CFC income foreign tax credits;
- Credits for foreign tax paid;
- Non-resident withholding tax;
- Resident withholding tax deductions;
- Non-residential portfolio investor credits;
- PAYE or withholding tax deductions;
- Imputation credits or foreign dividend payment (FDP) credits;
- Maori authority credits
Taxpayers not required to pay provisional tax
A taxpayer is not required to pay provisional tax if the taxpayer’s RIT for the proceeding tax year is $2500 or less, even if his RIT exceeds $2500 at current year.
A taxpayer whose current year RIT exceeds $2500, and who is not required to pay provisional tax, may still liable for UOMI.
A taxpayer may voluntarily pay provisional tax or elect to be a provisional taxpayer.
Options of calculating provisional tax (s RC 3-10)
1. Standard method (s RC10): Provisional tax is calculated at an increasing percentage (normally 105%) of previous year’s RIT. If previous year’s RIT is not available, the number can be calculated at 110% of two years previously. Provisional tax is paid in two or three equal instalments during the year.
2. Estimation method (s RC7): provisional taxpayers may estimate their RIT for an income year and pay their provisional tax based on the estimate. An estimate can be revised at any time up to the final instalment date. If your estimated RIT is lower than your actual RIT for that year, you'll be liable for UOMI. Provisional tax is paid in two or three equal instalments during the year.
3. GST ratio method: provisional tax is calculated based on taxpayer’s GST taxable supplies for each two-month period. Taxpayers will make six provisional tax payments of differing amounts depending on their taxable supplies during each two-month period.
The formula to get the ratio is (s RC8) :
(RIT for previous tax year/Total GST taxable supplies for corresponding income year) * 100
After that, taxpayers just need to multiply their total GST taxable supplies for their latest two monthly GST period by the ratio percentage calculated above.
Terminal tax is the balance of income tax after deducting all available tax credits and after deducting any provisional tax payments. The unpaid amount is subject to UOMI at a rate of 8.4%.
Refund of overpaid provisional tax:
Overpaid provisional tax is refundable. However, the commissioner would credit the excess provisional tax against any unpaid income tax due by the taxpayer in respect of current year or any earlier tax years (TAA, s 173Q). IRD have to pay UOMI on the excess amount, but at a very low interest rate of 1.75%.