What are the different ways of calculating Provisional Tax?
In New Zealand, there are 4 different ways to calculate Provisional Tax.
Have a read of our short summary below and if you’d like to understand business income tax a little better, we recommend checking out our article Business Income Tax Explained which goes into more detail about the different tax types and how they are calculated.
Every business is different so which method of calculating provisional tax should you choose?
If you’re unsure, feel free to get in touch to discuss your situation.
The Standard Method of Calculating Provisional Tax
This method is simple as it simply adds 5% to the previous year’s tax and requires paying in two or three installments throughout the year.
The standard method is the default option for small business.
The Estimation Method
The estimation method is as its name suggests – you are able to estimate your profits for the year and pay provisional tax based on these projections.
This can be a good option if you predict your income will vary significantly from the year before.
Be careful though – If you underestimate your provisional tax, you could be charged a penalty or interest if your estimate is too low compared with your actual residual income tax!
The Ratio Method
The ratio allows you to calculate provisional tax as a percentage of sales in each GST return.
This method matches provisional tax with business activity meaning you pay more when business is good and less when it drops off.
The Accounting Income Method (AIM)
Under the AIM method, provisional tax is paid on your actual profits throughout the year. Management accounts are sent from your accounting software directly to IRD every two months to support these calculations.
Like the ratio method, this means you pay more when business is good and less when business drops off.
Your tax paid at year end should be accurate with no significant end of year catch-up required.
If you think AIM may be a good option for you, give us a call to discuss so that we can ensure you are fully aware of the implications.
Robb MacKinlay is an accountant and business advisor to professionals and consultants, helping them convert their expertise into profitable business.
Contact us with your business questions.
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