Part 1 About provisional tax
What is provisional tax?
What income should you pay provisional tax on?
Who has to pay provisional tax?
People who use a special tax code

Part 2 Working out provisional tax - standard option
Standard option

Part 3 Working out provisional tax - estimation option
How to estimate your provisional tax
What you need to do about provisional tax estimates

Part 4 How and when to pay
Payment dates
Making the payments

Part 5 New provisional tax payers
Payment dates for new provisional tax payers

Part 6 Late returns and late payments
Late returns
Extension of time
Late payments and short payments
Instalment arrangements
Refunds of overpaid provisional tax

Part 7 Interest
Individuals
Non-individuals
Interest charged or paid

What is provisional tax?
If you earn income that isn't taxed, or has too little tax deducted before you receive it, then you have to calculate how much tax you owe and pay that amount to Inland Revenue during the year. The tax that you pay during the year (normally in three instalments) is called provisional tax. When you fill in your tax return to calculate your end-of-year bill, you deduct the provisional tax that you have paid during the year.

What income should you pay provisional tax on?
Provisional tax is paid on income that has either no tax or too little tax deducted when you receive it. You don't pay provisional tax if you only have income from wages and salary (source deduction payments) , resident withholding income or non-resident withholding income.

Residual income tax
Generally, your residual income tax determines whether you have to pay provisional tax for the following year.

You calculate your residual income tax on your end-of-year tax return. It is the tax payable after you have deducted any tax credits and rebates from your income tax. It does not include any

Who has to pay provisional tax?
If your current year's residual income tax is $ 2,500 or more, and you expect it to be $ 2,500 or more for the following year, then you have to pay provisional tax. If your current year's residual income tax is $ 2,500 or more, but you expect your following year's residual income tax to be less than $ 2,500, you can decide whether or not to pay provisional tax. If you decide not to pay provisional tax, you should estimate your current year's provisional tax at nil. Please read the notes about estimating in Part 3.

However, if you are an individual and you estimate your provisional tax, you may be liable for shortfall penalties if you did not take reasonable care at the time you made your estimate. Please read the notes in Parts 6 and 7 for more information.

People who use a special tax code
If your last year's residual income tax was $ 2,500 or more, and you have a special tax code for the current tax year to cover your provisional tax liability, your options are either

There will not be any additional charges, such as interest, as long as your residual income tax ends up being less than $ 2,500. This should happen with a special tax code, if you gave us details of all your income when you applied and told us about any major change in your income during the year.

Changes in income
It's important to let the IRD know if your income changes, so they can change your special tax code if necessary. If your residual income tax turns out to be $ 2,500 or more, you will be liable for a late payment penalty on any late or unpaid provisional tax.

Interest
You will be liable to pay interest if you

There are two ways of working out provisional tax - the standard option and the estimation option. This part explains the standard option, and Part 3 explains the estimation option.

Standard option
The IRD automatically charges you provisional tax using the standard option unless you use the estimation option. They calculate your provisional tax liability by adding 5% to your residual income tax for the preceding year, that is, your 2001 provisional tax is your 2000 residual income tax plus 5%. If the preceding year's return is not filed, you should then use the prior year's residual income tax and add 10% to calculate your provisional tax liability.

If you think your income for the current year will be more than the past year, you can make voluntary payments above the amount you have to pay under the standard option.

Under the standard option you may be paid or charged interest, depending on whether you paid too much or too little provisional tax. This applies to

Standard option calculation for 2001 provisional tax

Example
Cowboy Contractors Ltd has 2000 residual income tax of $ 30,000.

2000 residual income tax $ 30,000
                 plus 5% $  1,500
                         --------
2001 provisional tax     $ 31,500


Instalments for a 31 March balance date:
7 July 2000              $ 10,500
7 November 2000          $ 10,500
7 March 2001             $ 10,500
                         --------
                         $ 31,500

Standard option for individuals with income over $60
From 1 April 2000 there will be a new individual tax rate for income earned over $60,000. Any income earned over this amount will be taxed at 39 cents in the dollar. For the correct amount of provisional tax to be paid you must calculate your residual income tax based on the new tax rate. New rules apply to anyone on the individual rate (including unincorporated bodies) whose annual income is over $60,000 and who uses the standard option to calculate their provisional tax.

These rules require you to calculate your residual income for 2000 as if the new tax rates applied. If you received income, salary, wages or interest for which a tax credit is allowed in calculating residual income tax, and that income would be subject to the higher rate, the tax credit should also be adjusted to take the higher tax rate into account.

Example

Taxable income from return        $ 85,000
less                              $ 60,000
                                  --------
                                A $ 25,000
Tax on A at 39%                   $  9,750
Add tax on $ 60,000               $ 14,670
                                  --------
                                = $ 24,420
Less any tax credits*             $ 21,000
                                  --------
Balance                           $  3,420

Multiply the balance by 105%
to calculate 2001 provisional tax $  3,591

* For gross earnings over $ 60,000 with PAYE deducted, interest with RWT deducted, or estate/ trust income with tax paid by the trustee, multiply the excess by 6%. Add this to the 2000 tax credits and subtract this from the total tax figure.

If you haven't sent in your return, you'll find information on how to work out your provisional tax in Part 6.

If your untaxed income is less than the previous year's, you could end up overpaying your provisional tax. If you are an individual and you overpay, the IRD only pays interest if your residual income tax is more than $30,000.

If you calculate your provisional tax using the standard option, you can change to the estimation option at any time up to your third instalment date.

However, once you have adopted the estimation option, you cannot change back to the standard option.

How to estimate your provisional tax
To estimate your provisional tax you have to estimate your income and then calculate the tax on it. When you're working out your tax, keep these points in mind.

For individuals and unincorporated societies

For income up to and including $ 38,000        19.5 cents in the dollar

For income over $ 38,000 and up to $ 60,000    33 cents in the dollar

For income over $ 60,000                       39 cents in the dollar

Non-individuals
Use the following tax rates when determining the tax on taxable income.

Companies                                      33 cents in the dollar

Trustees of group investment funds             33 cents in the dollar

Maori authorities                              25 cents in the dollar

Undistributed rents, royalties and interest
of Maori trustee income                        25 cents in the dollar

Other trustee income                           33 cents in the dollar

Specified superannuation contribution          33 cents in the dollar

Incorporated societies                         33 cents in the dollar

Here are some examples to help you.

Example 1

In this example, all of an individual's income is untaxed.

Estimated untaxed income                        $ 80,000
                                                --------
Tax on this income                              $ 22,470

Income up to $ 38,000 @ 19.5%        $ 7,410
Income over $ 38,000 and up to
$ 60,000 @ 33%                       $ 7,260
Income over $ 60,000 @ 39%           $ 7,800
                                     -------
Total tax on income                 $ 22,470

                                                --------
Provisional tax payable                         $ 22,470

For the standard 31 March balance date, the $22,470 is payable in three instalments

  first instalment           7 July         $ 7,490
  second instalment          7 November     $ 7,490
  third instalment           7 March        $ 7,490

Example 2

A company's estimated income         $ 60,000

Tax on this income @ 33%             $ 19,800
                                     --------
Provisional tax payable              $ 19,800

For the standard 31 March balance date, the $19,800 is payable in three instalments

  first instalment           7 July         $ 6,600
  second instalment          7 November     $ 6,600
  third instalment           7 March        $ 6,600

Example 3

In this example an individual has some untaxed income and a salary.

Estimated salary ( taxed at source)         $ 30,000

Estimated untaxed income                    $ 22,000
                                            --------
Total income                                $ 52,000

Income up to $ 38,000 @ 19.5%     $ 7,410
Income over $ 38,000 and up to
$ 60,000 @ 33%                    $ 4,620
                                  -------
Total tax payable                 $12,030

Tax on total estimated income               $ 12,030

Less estimated PAYE deductions
from salary                       $ 5,730
                                  ------------------
                                            $ 6,300

Estimated provisional tax payable           $ 6,300

For the standard 31 March balance date, the $ 6,300 is payable in three instalments

  first instalment          7 July       $ 2,100
  second instalment         7 November   $ 2,100
  third instalment          7 March      $ 2,100

Anyone can estimate their provisional tax
If you choose the estimation option, you cannot change back to the standard option, but you can re-estimate as often as you like up to your third instalment date. At this date your last estimate becomes final.

If your estimate is inaccurate and your residual income tax is $2,500 or more, you may be charged interest from your first instalment date and may be liable for a shortfall penalty. If you estimate your provisional tax and have paid too much, the IRD pays you interest.

If you choose to estimate you must take reasonable care in determining the amount payable at each instalment date. For example, if your year 2001 residual income tax is greater than your provisional tax paid, you may be liable for a shortfall penalty on the unpaid provisional tax.

For more information on lack of reasonable care, read the IRD booklet Taxpayer obligations, interest and penalties available from the IRD Online Library on the IRD website.

Use this worksheet to estimate your year 2001 provisional tax.

If you've estimated your income but need some help working out the tax on it, phone the IRD on 0800 377 774.

You make an estimate by choosing that option on your tax return. If you have already filed your return, or want to re-estimate, complete a Provisional tax estimation (IR 309) form.

You can re-estimate any number of times until your third instalment date, when your last estimate becomes final.

When making an estimate, you are required to take reasonable care.

What you need to do about provisional tax estimates

Payment dates
Provisional tax is generally paid in three instalments. If you have a standard 31 March balance date, your provisional tax instalment dates are

For balance dates other than 31 March, the provisional tax payment dates are every four months after your balance date, on the 7th of the month. For example, if your balance date is 30 June, your first provisional payment is due on 7 October.

Balance date changes
You must ask for written approval from Inland Revenue if you want to change your balance date. If they approve your request they advise you of any changes to your provisional tax instalments and due dates, and let you know the amount payable on those instalment dates.

Making the payments
When you've worked out your provisional tax, keep a note of each instalment amount and the dates they are payable. You must pay each instalment by the payment date, even if you have not received your statement.

If you paid provisional tax last year, the IRD sends you a reminder letter before each instalment date. A payment slip and a pre-addressed envelope are included. Use the payment slip and envelope, so your payment is sent to the right office and credited to your account correctly.

You can also pay, by cheque or cash only, at any branch of WestpacTrust.

If you are paying provisional tax for the first time, complete a Payment slip (IR 592C) and send it with your payment. If you do not have an IR 592C, send a note with your payment giving your full name, address, IRD number and the year the payment is for.

Some new provisional tax payers have to pay provisional tax in their first year of operation. You will be a new provisional tax payer if

The date a business starts will determine how many provisional tax instalments the new provisional tax payer must pay.

If you don't fit the definition of a new provisional tax payer, you start paying provisional tax after you fill in your tax return and work out your residual income tax.

Payment dates for new provisional tax payers
Provisional tax is payable on the instalment dates which fall more than 30 days after the business has started.

Provisional tax is paid in

For the income tax year ending 31 March 2001, this means paying

Those liable for interest are:

New provisional tax payers are liable for interest from their first instalment date.

Example 1 Homonda Range Farms Ltd started business on 17 April 2000. They have a standard balance date, and their year 2001 residual income tax is $21,000. Based on the start date, they should have paid year 2001 provisional tax in three equal instalments.

Interest is charged from the first instalment date - 7 July 2000.

Example 2 Paula Royd Photography Ltd started business on 17 July 2000. Her residual income tax for the year 2001 is $51,000. According to the start date, she should have paid year 2001 provisional tax in two instalments.

Interest is charged from her first instalment date - 7 November 2000.

Late returns
If you don't have a tax agent and cannot send your return by the due date (7 July 2000 for the 2000 tax year for 31 March balance date) , you must phone the IRD on 0800 377 774 to apply for an extension of time. If a tax agent prepares your return they will usually arrange this for you. If you are granted an extension of time, read the next two pages to find out how to calculate your provisional tax.

Extension of time
If you have an extension of time to file your return, use the calculation methods below to work out your provisional tax instalments. These methods will also apply to future years.

First and second instalments

Standard option
If your 1999 residual income tax is $2,500 or more and you haven't sent in your 2000 tax return before the second instalment date, your first and second instalments of year 2001 provisional tax (that you pay before you have sent in your return) are each one-third of your 1999 residual income tax, plus 10%.

Your third instalment is calculated on your actual provisional tax for 2001, based on your 2000 residual income tax. If you haven't sent in your 2000 tax return by the third instalment date you must make a payment based on what you expect this will be. If you underpay, we may charge you late payment penalties when you have filed your 2000 return.

Individuals with income over $60
Individuals with annual income of over $60,000 who have not filed their 2000 income tax return must calculate their provisional tax for 2001. You must use your 1999 residual income tax and remember to apply the new rates. 2001 provisional tax will be the calculated 1999 residual income tax plus 10%.

Estimation option
With the estimation option, your first and second instalments of year 2001 provisional tax are both simply one-third of your estimate (see Part 3 for more details.)

When you file your tax return
When you send in your return, you can calculate your provisional tax accurately. If the instalments you have paid are less than you should have paid, you must make up the difference when you pay your next instalment. If you have paid all three instalments you must pay the difference immediately.

If your Notice of assessment (IR 510) shows that you are not liable for provisional tax because your residual income tax is less than $2,500, you may apply in writing for a refund of any provisional tax paid.

Special case
If you have an extension of time to file your 2000 return and your 1999 residual income tax was less than $2,500, you can delay paying your year 2001 provisional tax until the earlier of

Late payments and short payments
If your provisional tax instalments are paid late or are short paid, you will be charged a 5% late payment penalty if the unpaid amount exceeds $100. A 2% late payment penalty is charged on any unpaid amount of tax and penalties every month until they are paid. These late payment penalties do not apply to any interest charged.

If you estimated your provisional tax and your residual income tax is $2,500 or more, you will also be charged interest if you have more than $100 unpaid provisional tax (including any late payment penalties) after the payment due date.

You will be liable for interest payments if you

Instalment arrangements
If you are in financial difficulties and can't make your payment on time, you can reduce late payment penalties by contacting the IRD to arrange to pay your tax in instalments. You can do this before or after the due date.

If you make an arrangement before the due date for payment, and keep to all terms, the initial late payment penalty of 5% will be reduced to 2% and all incremental penalties will be cancelled after the tax is paid.

If you make an arrangement after the due date, and keep to all terms, the 5% initial late payment penalty and incremental penalties incurred before the arrangement began still stand. However, any further incremental penalties you incur after you start the instalment arrangement will be cancelled.

Refunds of overpaid provisional tax
If you've paid more than you needed to, you can request a refund of the overpayment. You can do this by completing the relevant box under the question "Getting a refund - how do you want it paid?" on your income tax return.

Before refunding any overpaid provisional tax, the IRD offset it against any taxes you may owe.

Example
Stan hadn't sent in his 2000 return when he calculated and paid his year 2001 first and second provisional tax instalments, so he based them on his 1999 residual income tax.

When Stan sent in his 2000 return he worked out his correct 2001 provisional tax and found that he had paid more than he needed to.

As Stan has no outstanding arrears to offset this overpayment, he needs to tell us what he wants done with his overpayment. To do this he should complete the relevant box under the question "Getting a refund - how do you want it paid?" on his income tax return.

The IRD pays any refund directly into your bank account as soon as they have processed your return. Make sure your correct account number is printed on your return.

Individuals
If you are an individual and you have paid too much provisional tax the IRD pays you interest, or if you have not paid enough provisional tax they charge you interest. This will only apply to individuals who estimate or have residual income tax over $2,500, or have residual income tax over $30,000, or who are trustees with residual income tax on trustee income of $2,500 or more, or who hold a Certificate of exemption from resident withholding tax (IR 15C). The interest rates are aligned with market interest rates.

Interest you pay is generally tax deductible, while interest paid to you is taxable. Inland Revenue deducts resident withholding tax from any interest paid to you.

Interest applies from your first provisional tax instalment date if

To find out how interest is calculated phone the IRD on 0800 377 774.

If they charge you interest it keeps accruing until all the tax owing is paid in full. Interest no longer stops at the due date for payment of your end-of-year income tax.

If the IRD pays interest it continues to accrue until the date they refund it.

Non-individuals
For non-individuals, interest is charged or paid as follows

Interest the IRD charges is generally tax deductible. Interest they pay you is taxable income. They deduct resident withholding tax from any interest they pay to you, unless you have a Certificate of exemption from resident withholding tax (IR 15C).

The interest rates for underpaying and overpaying tax are different. This reflects the different market rates for borrowing and lending.

If a non-individual is charged interest it keeps accruing until all the tax owing is paid in full. Interest no longer stops at the due date for payment of your end-of-year income tax.

If the IRD pays interest it continues to accrue until the date they refund it.

Interest charged or paid
You are liable to pay interest on unpaid tax, and the IRD pays you interest on overpaid tax.

The amount of interest payable is calculated daily using the formula

T times R divided by 365

T is the unpaid or overpaid tax on which the interest is payable. This is the difference between your residual income tax and the provisional tax you paid. (Penalties for late or short payments are included.)

R is the paying rate applying on the day. To find out the correct rate, call the IRD on 0800 377 774.

They will tell you about any interest charged on your Notice of assessment (IR 510) You do not have to pay the interest, or the tax it is charged on, until the due date shown on your IR 510. However, the interest will continue to accrue until the full amount of tax owing is paid. The accrued amount is shown on your Statement of account (IR 516).

If you would like an explanation of how your interest was calculated, please phone 0800 377 774.

Editors Note: This document originally published in PDF format on the IRD Website. Converted to a browsable format by Ace Payroll. Based on tax laws as at 28th June 2000.