How to avoid the common mistakes with Provisional Tax

If you are liable for provisional tax and you don’t pay, underpay or pay late, you may be liable for both penalties and use of money interest (UOMI). There are ways to minimise your exposure to these and to manage provisional tax to best suit your business.

Adverse events affecting provisional tax

If your business has been affected by COVID-19 or certain other adverse natural events such as flooding, cyclones or earthquakes which affect your income, you may be able to request tax relief. If:

▪ you need to re-estimate your provisional tax because your income falls short of the estimate and provisional tax has been overpaid, it may be possible to arrange early refunds

▪ you are unable to pay tax by the due date, Inland Revenue has discretion to write-off penalties and interest. As soon as you can, you should indicate when tax can be paid, or request instalment arrangements. You may be eligible for a UOMI write off.

Penalties

If you’re late paying tax, a 1% interest rate is charged from the day after the due date on the tax owed. After 7 days, the interest rate rises to 4% and applies to both the tax owed and any penalties applied. If you’re unpaid tax is $100 or less, than late payment penalties will not apply.

Late payment penalties are only calculated once your actual RIT liability for the year is known and don’t apply if the unpaid tax is $100 or less.

Use of money interest (UOMI)

In addition to late payment penalties, the Use of Money Interest (UOMI) applies from the day after your first provisional tax payment was due (unless you are a safe harbour taxpayer).

From 29 August 2023, the interest rate charged by Inland Revenue on unpaid tax is 10.91%.

Methods to minimise penalties and interest

The method that you choose to use to pay provisional tax can limit your exposure to penalties and interest. For example, taxpayers using the standard option will not be liable for UOMI on the first two provisional tax instalments (provided they have paid the correct amounts calculated under the standard uplift method), but interest will be payable on any total shortfall/overpayments of provisional tax calculated from the third instalment date (if your RIT liability is greater than $60,000). If you’re using the Accounting Income Method (AIM) you should no longer have terminal tax liabilities (as tax payments will be made in near real-time and are based on actual results). We should be able to identify any shortfall and makes sure it is paid by the final instalment where the adjustments are easy to calculate. You might also make voluntary payments of provisional tax. This will help reduce UOMI charges on any known tax shortfalls. While voluntary payments may earn interest, it is typically at a lower rate than interest rates offered by commercial banks. From 29 August 2023, Inland Revenue’s UOMI overpayment rate is 4.67%.

Other options

Early-payment discount for new small businesses

If you have a new business and are self-employed (operating as an individual) or a partner in a partnership you may be entitled to a discount of 6.7% of the income tax on business income received before the year in which you are first due to pay provisional tax.

Tax pooling

Tax pooling is a where you pay an authorised intermediary such as Tax Traders a one-off, tax-deductible fee and it arranges the upcoming payment on your behalf. When you repay the principal at the date agreed with the intermediary, the independent trustee instructs Inland Revenue to transfer the tax into your IRD account. Inland Revenue treats the tax as being paid on time once the transfer is processed.

Need help?

It’s important to keep your tax plan current. If circumstances change for your business, we need to adjust your plan. Keep us updated about the situation for your business.

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