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Your Options for Managing Provisional Tax

Your Options for Managing Provisional Tax

img_5621Article by Heidi Pope

BUSINESS ADVICE, TAX, CONSULTANT, STAPLES RODWAY TARANAKI

Heidi.Pope@staplestaranaki.co.nz

 

I haven’t met many people who like paying tax, let alone paying tax in advance.

If you paid more than $2,500 tax last year, then next year, by default, you are required to pay 5% more. You are required to pay it in 3 equal installments during the year, usually before you have earned the income. This works perfectly well if you have a steady, constant income stream, however there are only a handful of taxpayers who are in this situation.

Here are some different options available to help you manage provisional tax payments:

Tax Pooling

  • Useful when you have not paid enough provisional tax during the year
  • The interest rate is lower than IRD’s interest rate
  • Can be used to eliminate IRD penalties

Tax Deposit

  • Useful when you know you will have tax to pay, but difficult to forecast with certainty how much you will need to pay
  • Easy to get refunded if you realise you have overpaid or you have a cash crisis and need cash now
  • Easy to transfer payments between your other entities if you pay tax for more than one entity
  • Allows you to make payments towards tax when you have cash available to do so, rather than having to pay on the due dates

Forecasting

  • Useful when you can forecast the years income with reasonable certainty
  • Allows you to pay tax on due dates without incurring IRD interest or penalties
  • You pay interest at your banks interest rate, which is usually lower than IRD’s or a tax intermediary’s

We have had a lot of success in reducing interest costs and penalties by using tax pooling and tax deposits.

There are upcoming changes to the provisional tax regime which will reduce many individuals and trusts exposure to interest. These changes are set to take place from 1 April 2017.

If you would like to discuss whether any of these options could work for you, please contact me or your usual Staples Rodway accountant.

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