You may have heard that the IRD have introduced some changes to the way they manage Provisional Tax.
For many years, some of the biggest gripes we have heard from our clients have related to Provisional Tax.
Why do you have to pay tax based on guesses as to what you are going to earn, and then get penalised if you get it wrong? And yes, we know that Use of Money Interest (UOMI) is actually interest and not a penalty, but people still see it as a penalty, especially as the IRD charge and pay interest as if they are a bank- they pay it at a low rate and charge it at a high rate.
Finally the IRD have listened and have taken the first steps towards making it a bit fairer.
The changes mainly relate to the timing of the interest charges on your Prov Tax payments. Companies and Trusts used to get charged interest back to the first Provisional Tax date. Now it won’t be charged until after the last Provisional Tax payment is due.
What this means for you:
No matter what entity you trade through, as long as you pay Provisional Tax using the Safe Harbour method (a standard uplift on your last filed tax return), UOMI won’t apply until after the final instalment of Provisional Tax.
Unless (of course, there’s always an unless) your residual income tax (RIT) is over $60,000pa.
This takes a lot of the guess work out of the first two Provisional Tax instalments each year.
In most cases now, we will send out payment notices for the first two instalments based on the standard uplift.
Although if you fall outside of the Safe Harbour Thresholds or your income is significantly different in the current year, we will continue to work with you to ensure that you don’t pay too much or that you have put enough aside to pay the extra tax when it is due.
If you have would like further information about how these changes affect you, give us a call on 04 910 3340.
This is the first step in a number of changes the IRD are planning over the next few years. Their stated aim is to make paying tax simpler and fairer. We will keep you informed as the changes come into force.