Provisional tax is one of the most misunderstood areas of the New Zealand tax system. For many Kiwi business owners, it raises the question: are we being over-taxed? In this episode, Matt Harris - breaks down what provisional tax is, how it works, and why it often catches people out.
What is Provisional Tax?
Despite its name, provisional tax isn’t actually a tax in itself. Instead, it’s a mechanism where business owners prepay their income tax across the year, rather than being hit with one big bill at the end.
The system is designed to prevent nasty surprises. Too often, business owners reach the end of the year, see their profit and tax bill, and realise the money’s already been spent on drawings, loan repayments, or operating costs. By spreading payments throughout the year, Inland Revenue reduces the chance of unpaid or unmanageable debt.
If your residual income tax is over $5,000, you’ll fall into the provisional tax system. Payments are typically split into three instalments:
-
28 August
-
15 January
-
7 May
Terminal tax (the balancing figure) is then due the following 7 April.
Are Kiwi Business Owners Over-Paying?
This is where things get tricky. Provisional tax is usually calculated off the previous year’s tax liability plus a 5% uplift. But if your business has a downturn, you could easily end up over-paying tax.
You can resubmit if you expect lower profits, but if you get it wrong, Inland Revenue charges penalties and interest. On the flip side, if you pay too little, you’ll face the same problem.
For sole traders, there is one rare silver lining: if you voluntarily pay provisional tax in your first year, you can receive a 6.7% discount on your tax bill. It’s one of the only guaranteed tax discounts available in New Zealand.
Common Mistakes with Provisional Tax
Matt Harris highlighted several recurring issues he sees with Kiwi business owners:
-
Missing payment dates.
-
Not realising they’re required to pay.
-
Failing to set aside cash during the year.
-
Underestimating earnings and triggering penalties.
These mistakes often come down to poor cashflow management and a lack of proactive planning. While accountants can help guide the process, business owners also need to be hands-on, track profits, and keep an eye on upcoming obligations
Tax Pooling: A Smart Solution
To ease the pain of penalties, many businesses now use tax pooling. This system allows taxpayers who overpay on time to effectively “sell” their surplus tax credits to those who paid late.
For example:
-
If you miss your 28 August payment and settle on 30 November, you’d usually face interest and penalties.
-
Through tax pooling, you can buy tax credits dated back to August, wiping out those charges.
It’s essentially a marketplace of tax payments that benefits both parties. Overpayers earn a small return, underpayers avoid harsh penalties, and intermediaries like Tax Traders facilitate the swap.
Key Takeaways
-
Provisional tax is not a separate tax – it’s a prepayment system for income tax.
-
Kiwi business owners often feel over-taxed due to uplift rules and overpayments.
-
Payments are usually made in three instalments, with terminal tax balancing the difference.
-
Common mistakes include late payments, underestimating profits, and poor cashflow planning.
-
Tax pooling can significantly reduce penalties and interest for late payments.
-
Being proactive with your accountant and keeping track of profits is essential.
Next Steps
If you’re a business owner or property investor with provisional tax to manage, Lighthouse Accounting can help you structure your tax and cashflow so you’re not left scrambling at year-end.
If you’d like to learn more, check out these other episodes below.
For a no obligation discussion to see how we can help you on the path to wealth, please contact us.
Disclaimer:
The information in this article is general information only, is provided free of charge and does not constitute professional advice. We try to keep the information up to date. However, to the fullest extent permitted by law, we disclaim all warranties, express or implied, in relation to this article – including (without limitation) warranties as to accuracy, completeness and fitness for any particular purpose. Please seek independent advice before acting on any information in this article.
