7 May – Tax Rules For Provisional Tax Payers Are you a 2022 provisional taxpayer?

2021 terminal tax was due on 7 April 2022, and now most of us are in for a double tax hit with GST and 2022 provisional tax both due on 7 May 2022.

There are fewer provisional taxpayers now as the threshold for provisional tax increased from $2,500 RIT (residual income tax) to $5,000 RIT.  In simple terms, RIT is tax payable before provisional tax payments.  If you had less than $5,000 RIT for the 2021 tax year then you are not required to pay the 2022 provisional tax.

Provisional Tax Methods

There are three different ways of calculating provisional tax:

1. Ratio Method – you pay provisional tax as a % of turnover (the ratio is calculated based on the previous year’s tax)
2. Standard Method – either 105% of last year’s RIT, or 110% of the RIT from two years earlier if your tax return for last year is not yet complete.
3. Estimation Method – you estimate your expected RIT and pay accordingly.

Use of Money Interest (UOMI)

Provisional taxpayers may be charged UOMI by IRD if their provisional tax is short paid and their RIT is more than $60,000, or if they used the estimation method and short-paid their provisional tax.

For companies, RIT of $60,000 equates to around $214,000 taxable income.  For individuals RIT of $60,000 equates to around $183,000 income (excluding source deduction income subject to PAYE or Withholding Tax).

The current annual rate of UOMI is 7% which is likely to increase as we enter a period of increasing interest rates.

If your 2022 RIT is more than $60,000 and provisional tax has been paid using the Standard Method, then UOMI will run from 7 May 2022 until the tax shortfall is actually paid.

However, if your 2022 RIT is more than $60,000 and provisional tax has been short paid using the Estimation Method, then UOMI will run from the provisional tax dates that were short paid.

Tax Planning for Provisional Tax

Over the next few weeks, we will be looking at the provisional tax positions of clients expected to have more than $60,000 RIT for the 2022 tax year.  By calculating expected short payments taxpayers can increase the provisional tax instalment payable on 7 May 2022, thereby reducing exposure to UOMI.

Q2 Ltd is able to make retrospective tax purchases for clients exposed to UOMI and/or late payment penalties.  This can significantly reduce the interest and/or penalties otherwise payable.

Also, if your expected 2022 tax is likely to be significantly less than in 2021 we can estimate the provisional tax instalment due 7 May 2022 to be a lower amount.

Summary

Contact Q2 Ltd if you are unsure how much provisional tax you should be paid on 7 May 2022, or if your tax situation has changed.

Q2’s Mid Week Huddle helps business owners stay focused on what’s important, but not urgent.  Feel free to share your feedback, ideas or challenges.  Until next week!