Provisional Tax – what if you get it wrong?


You are probably aware that Inland Revenue allow you until 7 April of the following year to pay the balance of tax owing – just over a year of credit. Further, if your Income Tax liability for the year is under $60,000 IRD do not charge interest on this tax deferral.

However, this is subject to some provisos and the important ones are that:

  • The Provisional Tax for the year has been based onthe previous year’s tax (the “safe harbour” option).
  • Provisional Tax calculated on this basis has been paid in full by the due dates.

If these conditions are not met, the whole year’s tax is taken out of the “safe harbour” arrangement and the interest clock is started. The interest is not only charged on the late payment itself, but will be charged on the

Terminal Tax which would not have been subject to interest had the above conditions been adhered to. The practical effect is that you can pay interest which is well out of proportion to the actual amount, or time, of the late payment.

Fortunately there is a remedy. This is in the form of purchasing tax credits through a tax pooling intermediary. We use Tax Management NZ (TMNZ) for this purpose. This allows you to retrospectively purchase a tax credit at an earlier date. This is then fed into the IRD system at the due date and is treated as being paid on time, thus restoring the interest free status of the remaining tax.

There is some interest payable to TMNZ but it is typically around 4.50 % pa (lower than IRD interest) with no further fees charged by them.

The key to effective use of TMNZ is to contact us when a short (or late) payment situation has occurred so we can establish payment through TMNZ. Do not make the payment directly to IRD. If this is done the payment will be recorded as late, with the consequences as set out above.

All information in this news story is to the best of the authors' knowledge true and accurate. No liability is assumed by the authors, or publishers, for any losses suffered by any person relying directly or indirectly upon this newsletter. It is recommended that clients should consult a senior representative of the firm before acting upon this information.

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