Advice On Provisional Tax From Mahoney Accounting, Tax Accountants And Advisers

Many people find provisional tax confusing, so one way of looking at it is to compare it to PAYE (pay as you earn) that employers deduct from the weekly, fortnightly or monthly salary or wages they pay their employees. As a result of these regular tax deductions, most employees have met their tax obligations at the end of the financial year and don't need to file a tax return.

For people who don't deduct tax on a regular basis, provisional tax allows them to pay instalments so they too have met most of their tax obligations throughout the year rather than facing a large tax bill at the end of the financial year. People who don't have tax deducted during the year include business owners, the self-employed, contractors, rental property owners and those who receive income from a partnership, estate, trust or from overseas. Provisional tax therefore helps such people to manage the payment of tax by spreading the burden through instalments.

People need to pay provisional tax if the amount of tax left to pay (residual income tax) on their last tax return is more than $2,500. Many new business owners make the mistake of not taking provisional tax into account. It can be difficult keeping track of the amount of tax that should be set aside for GST and provisional tax, especially as income and expenses can be variable when a business is just starting up. Unfortunately, not putting aside funds to meet tax obligations is a common reason why many new businesses fail. If taxes are not paid when due, penalties and interest are applied and this increases the final bill, making it even harder to manage.

A good accountant can help business owners to budget for provisional tax instalments by analysing monthly profit and recommending the amount to save before it is due. Your accountant can also recommend the best method to use to calculate your provisional tax. For example, for those whose income is increasing the standard method may suit best. This method takes their residual income from last year and increases it by 5%. The advantage of this method for individuals with residual income tax of less than $50,000 is that no interest is charged provided that the year's tax liability has been paid by the terminal tax due date.

For those who are registered for GST and whose income tends to vary from month to month, the ratio option may be better. Using this method, they will make variable provisional tax payments every two months with their GST returns.

There is also a third method called the estimation option if someone’s income is dropping. However, if they make a mistake and underestimate the amount of provisional tax, the penalty imposed may be severe. Alternatively, their accountant may recommend that they use a tax pooling intermediary where they send provisional tax payments to the intermediary who pools these funds together and uses them to pay their provisional tax instalments to the IRD

Having a good accountant you can talk to and trust will save time, money and worry as he/she can help to choose the best method to calculate provisional tax, set aside payments before the due dates, avoid penalties and interest for late or underpayment and allow people to do what they do best – run their business.

For anyone who has started a new business or partnership, registered a new company or purchased a rental property, are self-employed or receive income from a trust, estate, or from overseas and need an accountant, they should contact Mahoney Accounting at http://www.mahoneyaccounting.co.nz  who will be happy to help them manage their business, explain provisional and other taxes further and help them to plan for the future including being prepared for their provisional and other tax obligations.