Provisional tax relief on the way

Provisional tax. Just the very thought of those two words is enough to send a chill up the spine of many a business owner. Difficult to get right and expensive to get wrong, provisional tax has been the source of frustration for many over the years.

After all, the current rules are somewhat unfair. They assume you possess clairvoyant-like powers and can predict your income tax liability in advance – and you are hit with interest (currently 8.27 percent) by Inland Revenue if you underpay.

However, having to pay it is about to get better – much better, in fact – for thousands of small- and medium-sized businesses across New Zealand with new provisional tax rules coming into effect from next month to coincide with the start of the 2018 tax year.

They apply to those using the standard method to calculate their provisional tax payments. The standard method means you base your payments on 105 percent of last year’s income tax liability (or 110 percent of the previous year’s liability if your return has not been filed). Most businesses use this method.

Changes to how and when IRD apply interest for taxpayers using the standard method will provide greater certainty over payments and reduce compliance costs. Here’s what you need to know.

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Article by Chris Cunniffe, CEO of Tax Management NZ, New Zealand's largest tax pooling intermediary. He was formerly the head of the BNZ and Air New Zealand tax teams.