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Business Tax

How could provisional tax be improved?

Provisional tax is the mechanism by which most businesses pay tax during the year.  The exact amount of tax to pay for an income year can only be determined after the year has ended.  The provisional tax rules, however, are designed to ensure that tax is paid during the year, rather than at the end. 

For example, the calculation and payment of business income tax could be based more on when income is earned during the year – much like a PAYE for business.  This has the potential to simplify the calculation of provisional tax, create more certainty for businesses, and better reflect cashflow.  Alternatively, a simplified system where provisional tax payments are based on another proxy (for example, a percentage tailored on a business’s turnover) could also be investigated.

How important is improving the provisional tax rules in reducing compliance costs for business?  Are there other more important issues the Government should be focusing on instead, or as well?

The Government seeks feedback on ideas for more effective, practical and simple methods of calculating and paying provisional tax. How could provisional tax be better aligned to other business processes?

Comments

Douglas
Provisional tax is a bit like a drought/flood. Business will have fluctuating income due to factors beyond their control An idea would be to allow provisional tax to be paid based on the previous quarter's actual/estimated results. That way business would not worry about penalties on underestimated annual income, as they had 4 opportunities to get it close.

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1 year ago
Russell
As a sole trader it would be easier to just pay the first two provisional tax installments - but calculated at the time, not guestimated at the beginning of the year. I do not understand the point of the third installment which is due well after the end of the financial year, final tax payment should be calculated at the end of year tax return.

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1 year ago
n.naidoo
As a freelance service provider my income has the potential to vary considerably and a set value for provisonal tax can be difficult when the income drops (as it has happened this year). The tax payer should decide on the provisional tax payable and any difference can be paid when the final return has been filed. I really don't think the present mechanism is fair to the tax payer where penalty is payable if a lesser amount is paid on the earlier due dates. Provisional tax is paid in advance anyway so due consideration should be given..

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1 year ago
David Allan
I suggest that provisional tax is only payable for larger companies. Perhaps a turnover < $1,000,000 no prov tax is paid but rather standard income tax. Tax should be paid as it is earned or at the end of the year. Either way estimating in advance is too difficult for small business so tax should be paid AFTER it is earned.

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1 year ago
Graeme McMillan
Of course, the advantage of provisional tax is that you get to pay smaller installments in advance, rather than a lump sum at the end. To be able to pay a lump sum at the end of your financial year you will have had to have saved some income and put it aside. In the same way, saving some income for provisional tax would allow you to pay provisional tax... The real problem is the unfairness and penalties around estimating .

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1 year ago
Guy Dobson
The key question is why do we need to have provisional tax at all when we all file tax returns within three months of our company year end and then pay tax owed on actual earned income rather than some pie in the sky guesstimate? Provisional tax is hated for its onerous impact on smaller growth company cashflow. This is the same as in the UK. Why not scrap it totally, streamline the system and reduce interactions with the IRD? Furthermore provisional tax shifts a varaible tax risk from the government putting the onus on businesses to carry more compliance risk when they least need it.

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1 year ago
Phil Osmond
Absolutely agree to no Provisonal Tax .. Small and emerging business's need money to make money . The more we earn the more Tax we pay anyway .. to take it off us first limits our purchasing power .. I have no problem allocating funds to pay tax once i have earn't it but prepaying on forward sales projections and then also getting penalized if you under estimate is very de motivating ...

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1 year ago
Tony Deli
1: pay tax with GST 2 monthly, Not at Christmas and holiday pay time. 2: Scrap company tax , flat rate 10% Like GST, Include business & Charities so everybody pays tax, NO exemptions, no deductions, No right off's, No need for accountants or office person doing IRD work for them, which means business save money 3: take tax of saving to encourage people to save, NOT invested in property

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1 year ago
Rachel Clifford
I find provisional tax difficult as my years vary so much yr to yr. If my previous yr was good my provisional tax is big; if I am then having a bad yr I have to find Provisional tax that I won't end up owing but still have to find. I like the two month GST return. It would be great if provisional tax could be done in a similar way. Not sure how it would be achieved and It wouldn't help if the accountant had to do the workings as they'd get rich at my expense. Most software packages do the GST for you, it would be great if they could be developed more to allow them to do provisional tax in some way.

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1 year ago
bob harding
my wife and i have been primary producers for the past 30 years - dairy, dry stock, and horticulture. the nature of farming is such that our income varies wildly, especially with horticulture. we have a good year, pay tax, no problem. however, as is often the case, the following year is a bad one but we have to pay provisional tax based on the good year when our income is needed to survive. i.e. we still need the inputs to the business in the hope the following year will be good again. with weather conditions, market conditions, and foreign exchange rates to contend with, it impossible to estimate income. we can get our accountant to do another set of accounts to determine how bad the bad year really is. obviously this costs us more money, but we become eligible for a refund. what this means is we enter into a paper war which only the accountant wins. ird scores one year and pays back the next. it has long been my contention that primary producers should be taxed on a 4 or 5 year average. this system would even out the highs and lows, enable us to plan for production, and save on accounting fees.

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1 year ago
Gareth Foster
Scrap prov tax completely and increase GST to 30% (drop income tax altogether). Tax revenues would stay the same if not better. Probably need an unpopular capital gains tax - but if you are not taxing peoples incomes it might be an easier sell for the gov. If you must keep income tax (*sigh*)... Prov tax is scary for a business owner as the penalties are quite heavy if you "guess" wrong. Be great to have a simple safe harbour way of calculating prov tax based off GST returns. It ignores losses carried forward and other things.. at least its based on cash in the door instead of an approximation of past performance. Another thing.. there should be a $5k buffer (or some other arbitrary amount) to your prov tax quess before penalties are applied. 8% penalty on $5k is $400 in penalties - thats a hefty amount for someone starting out.. surely a little wriggle room at the lower end would be ok?

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1 year ago
Mike Ashby
Changes to the provisional tax system are way overdue. Paying tax before the money's earned is, frankly, iniquitous, and the payment dates are all over the place. We have a small business employing 6 people. I'm preaching to the converted here as many of you small business owners are in the same boat sometimes wondering where the paddles have gone. Paying for staff holidays around Christmas (the 2 directors of my company don't get holidays because they have to cover for staff who do) is followed by 4 months of tax bills, the worst ones being in early January. We pay GST 2-monthly and this works well. Abolish provisional tax as soon as possible and replace it with a 2-monthly company tax, due on the 28th of the month following as with GST, but alternate the months so that we don't have to pay both taxes in the same month. It's much easier to budget in small increments rather than try to find serious tax money in the first 4 or 5 months of the year and perhaps run an overdraft. As with GST, incorrect payments, which would be likely be small, could be tidied up in the next due cycle. Small businesses now on 6-monthly GST should be changed to the same 2-monthly system paying in alternate months. I'm sure they would find budgeting easier (read 'necessary') and it would be harder to get behind. I can't comment on a fairer provisional system for large companies but I'm sure directors of such companies can make intelligent proposals if they want change as much as many the rest of us do.

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1 year ago
Peter Marr
Provisional tax is possibly one of the big hurdles for all new businesses- I believe the Govt isn't doing anyone any favours by paying for it the following year! Best solution in my view is pay as you go, this is a truly fear way. E.g. if you change your job and earn less you won't be burdened with having to pay provisional tax based on the earlier years earns. It's all connected too unfortunately ... for example ACC is based from the previous years earnings as well, and based on your possible previous job description.

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1 year ago
Barbara
Definitely need to take a 'pay as you go' approach, similar to regular GST returns

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1 year ago
David Stark
Any system that levies income tax based on an annual calculation of taxable income is never going to be simple unless collection takes place once the calculation has been undertaken, i.e. no provisional tax. However there are (at least) two major problems with this: Firstly, that the NZ Government needs to pay is bills throughout the year (although this could potentially be mitigated by businesses' balance dates being spread throughout the year rather than primarily in March, combined with shorter time frames for filing returns) Secondly, such a system would require taxpayers to meet their tax obligations in a single payment which is likely to cause many even greater cash flow problems than the current provisional tax regime where at least payments are spread over several instalments. A left-field option would be for all NZ businesses to be operated via a separate company structure that pays no tax, but all cash distributions (drawings, wages, interest, dividends) made to shareholders, investors, employees etc are subject to withholding tax that is paid to the IRD the month following the distribution. This would also have to be accompanied by a capital gains tax on the transfer of company shares to avoid people trying to realise the increased value of the company without paying any tax. This would enable people to have some control over their income tax liabilities (by only paying tax when there was money available to make a distribution) and, in theory, greatly simplify tax administration, particularly if combined with information being transmitted directly from the taxpayer to the IRD via accounting software.

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1 year ago
Trevor Wisenberg
Provisional tax should be scrapped. Business income varies greatly unlike salaried persons whose income (and therefore PAYE) is mainly constant and predictable. Therefore provisional tax, which is taxation historically based on previous income, not actual present income, is an unfair burden on small business and has the effect of undermining the viability of small business - just the opposite of what government professes to be its aim.

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1 year ago
Brian Whetton
I think that businesses should pay tax monthly according to their earnings or quarterly by arrangement with IRD; net earnings =zero = no tax

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1 year ago
SarahT
One issue I have with the provisional system is the way in which terminal tax must be paid earlier by those who file their own tax returns (7th February for a 31 March balance date) as opposed to 7th April for those who use an agent to file their statements. Why should those using agents get an additional 60 days - where is the equity in this?

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1 year ago
Brian Whetton
This is the same as for those on P.A.Y.E. It appears that the IRD is favouring companies that do tax returns. I have questioned this with IRD staff and met a "wall of silence"!. It would be great if an IRD spokesman had the guts to admit that they do this! Everyone knows! An explanation would be great!

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1 year ago
Izabelle Nagel
Please let us pay PAYE instead of those huge provisional tax amounts.We lost a huge contract last year,but still had to pay the provisional tax.We could,nt manage.We wasted hours and hours on the phone with the IRD to come up with a solution.If we could,nt just have paid PAYE on our earnings we would be okay.But now we have late fee penalties to.Luckily we gained more clients,but the damage is done.

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1 year ago
Lee Hanson
This is an absolute must; provisional tax can be so far out of sync with what is actually happening in the business it can cripple cashflow and stiffle business growth. Use of money interest is also unjust as when additional prov tax is paid businesses can't charge interest to the IRD.

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1 year ago
S
Yes please change the Provisional Tax system - I would be happy to pay my provisional tax fortnightly/monthly or even every two months in line with my GST. In fact I would love to have that option to align it with GST and input my earnings and the system calculate what I owe against those earnings. I calculate how much I save for it, but this would help if business and therefore earnings varies over time.

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1 year ago
Izabelle Nagel
I agree.Our accountant actually suggested that,because they realised when we had a dry spell,we could not keep up with the provisional tax.I feel like the small businesses are not being represented in a in a way that we can grow our businesses instead of just paying taxes and spend sleepless nights about how were going to manage the tax and pay our suppliers.

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1 year ago
Keith Smith
The current provisional tax is simply bonkers. I used to work for an employer and I earned $100,000 a year. I decided to leave and start my own business - so I had an income of ZERO. But, hey, the government not only wants me to pay provisional tax based on LAST years earnings but FINES me and charges me penalty interest if I don't earn enough in my new business to pay my provisional tax bills for NEXT year on time. I have just done my tax calculation for the end of year and I made a profit of only $20,000.00 last year but I am still getting demands for provisional tax based on earning $100,000. Somebody tell me that this is logical or fair? The point of my own personal example is that provisional tax is a HUGE burden for start-up businesses. Not only do you have to make enough money to cover your end of year tax bill for your first year in business but you have to pay next year's tax as well - it's a joke. If this country wants entrepreneurs to start business and innovate it needs to stop grabbing all the tax up front before companies have actually made any money. My suggestion would be for the government to host or link to an on-line accounting system (like xero), and make it compulsory for all new businesses to use that system for their first 2 years in business. The system could then "ring-fence" tax based on actual sales on a monthly basis and then bill the company for tax every 6 months until the two years are up. Yes, there are issues over stock, deductible expenses etc but they are not as big a risk for a fledgling business as being double-dipped for tax all the time. PAYE for small businesses would get my vote! It is hard enough trying to scrape together enough money to live when you are trying to get a new business off the ground - fines and penalty interest on tax you haven't paid (because you have not actually earned the money yet) really does not help. Is it too much to ask to make our tax system a little less aggressive, punitive, me first and vindictive while we are at it...............................sorry , drifted off into a little dream there :-)

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1 year ago
Izabelle Nagel
At last someone who speaks our language.I hope the IRD is taking note of this.We started a new business about 3 years ago and were putting in long hours but the ACC and provisional tax crippled us and put us behind before we even started.Now we have to work double the hours and supporting and raising 4 kids all while paying of our debt to the IRD.I say let us pay PAYE on our income.My husband and myself gets wages from our business.The rest basically stays in our business account for gst and taxes.How will we buy machinery and expand our business.Well if the provisional tax stays this high and we had a dry spell for 6 months we ask ourselves the question is it worth it?Sleepless nights and phonecalls from the IRD plus accountant fees.I hope something changes.

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1 year ago
PETER HULLIS
I ALREADY MAKE VOLUNTARY TAX PAYMENTS EACH MONTH ,WHICH WORKS FOR ME MOST TIMES , BUT WHY NOT HAVE A SYSTEM THAT IS LINKED TO THE GST PAYMENTS THAT I MAKE EVERY 2 MONTHS . E.G 10% OF TOTAL SALES AND A TOP UP OR REFUND AT THE END OF THE YEAR. BUT IF IT WAS WORKED OUT PERCENTAGE WISE OVER PREVIOUS YEARS IT SHOULD BE PRETTY CLOSE.

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1 year ago
Kerry Hart
Calculating provisional tax based on previous years isn't easy where revenue fluctuates from year to year due to factors beyond my control. It is inequitable to be penalised for underestimating earnings. There should be no penalties - just an adjustment to the final tax.

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1 year ago
Kylie
Advance payments relating to provisional tax often create hardship and stress in families who participate in industries that have a level of volatility associated with workflow. The assessed earnings are also not always reflective of a future years earning. The building industry is one such area where the cycle is cyclical and either a feast or a famine year to year.

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1 year ago
A
I think anything that stops those people who seem to treat Provisional tax collection as their own money then cry poor and get remissions when they can't pay is worth it, Pay as you go would be great for those people that are in business but just not good at managing money. Whilst you are at it IRD you need to get stricter on those who are in business but continuously do not pay their tax!

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1 year ago
Izabelle Nagel
We are local small business owners.We live a simple lifestyle.We were always up to date with our taxes,but halfway through 2014 the oil and gas industry took a nosedive,and we lost 50 % of our income.We only started recovering business wise about 2 weeks ago.What is very hard to recover from is the penalties and provisional tax payments we could not manage because we simply did not earn that much money.I understand there is fortunate business owners who flourish all the time and they probably don't have 4 kids like we have.I know of many families who have small businnneses and work inhumane hours like us ,that are to tired to spend any money let alone tax money.

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1 year ago
Megan Foster
I support the idea of calculating provisional tax as you earn, similar to PAYE, especially for very small businesses (sole trader and partnerships) of fewer than five people). With a company this size, it can be very hard to estimate how much you're going to earn over the next 12 months and it's very easy to underestimate or overestimate this figure. I've had my small business for 9 years and I don't think I've got it right once since I had to pay provisional tax. If there was some way of fixing the situation when a small business first goes onto provisional tax and has to pay the income tax for the past year and provisional tax for the year to come at the same time (like paying in advance and in arrears), this would be another plus. I suspect that this is when many small businesses could fail, as shouldering a double tax burden is very hard.

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1 year ago
Ian Thomson
We are a small owner operated business To make tax easier, we estimate our profit for the year, and pay PAYE monthly on that profit. We don't necessarily take the wages/salary that the PAYE is based on each month.

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1 year ago
Micky
1. Scrap Provisional Tax. 2. Pay Tax along with GST in installments over 2 month period (interest free). 3. Have an advanced flexible self service system which allows you to set up, control and amend your payments to suit cash flow. Pay daily, weekly, monthly - whatever suits your own business situation. 4. Option to elect longer payment period with interest if required. I feel this will make New Zealanders far more aware of their actual financial situation and lead to long term economic stability.

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1 year ago
Micky
For those who do like paying in advance - you should be able top up your account when you have surplus cash and gain interest on it.

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1 year ago
Gary Davis
I like this proposal to pay business tax as you go. I think the name Provisional Tax needs to be changed as taxpayers have a general misunderstanding of how the current system operates and they tend to think it is paying in advance when in reality it is paying as you go but based on the wrong year's results. definitely room to improve here and educate taxpayers to realise they are paying on their results for the current period.

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1 year ago
Euan
I think some people would have trouble paying tax whatever the system was. What is more frustrating , to me, is that they keep changing , and "simplifying " everything.

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1 year ago
Len
Please introduce the pay-as-you-earn system in lieu of the current Provisional Tax - income in a small business is rarely smooth / consistent, paying forward Provisional Tax based on last year's income can be wildly inaccurate and difficult to comply with.

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1 year ago
CathyB
As a small company owner, with lumpy income flows, paying provisional tax before I earn it is a struggle. I get penalized with use of money interest if I unexpectedly earn more in the second half of the year. I would strongly support a system where permits me to pay as I earn. Lets use this opportunity to fix provisional tax - no where else in the world is forced to pay tax before they earn the $$.

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1 year ago
Maria
Yes provisional tax should be changed, particularly where the next years provisional tax is a estimated with a 5% increase on the previous year. Contractors don't always know what their income will be for the coming year or even several months in advance. Paying tax on a monthly or bi monthly would help smaller businesses with their cash flow

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1 year ago
Sousa Jefferson
For self employed people who are also entitled to the Family Tax Credit (lower income earners who are self employed) - it would be really helpful to elect to have the estimated Provisional Tax offset against the Family Tax Credit. Every fortnight I receive the Family Tax Credit and 3 times a year I have a Provisional Tax obligation. It's not easy to meet this obligation in large chunks like this when you're a low income earner. I therefore pay my provisional tax monthly to keep on top of it. I essentially give my Family Tax Credit back each month. I think you'd have better compliance and less penalties for those on lower incomes who are in this particular situation. In general, there needs to be more options for Provisional than the one option available now.

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1 year ago
Wayne Duncan
The last provisional tax changes were stupid! Who thought making a provisional tax payment the same day GST is due as a good idea? Bad for client's cashflow and half the country is on holiday when the 15th January payment is due, and most accounting offices are closed!

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1 year ago
Kath
The Ratio method is a great way for seasonal businesses to pay their provisional tax. It works perfectly as we pay our provisional tax in accordance with our income on a regular basis, so when we have money we can pay our tax. We stay up to date and do not require to employ our accountant half way through the financial year to estimate whether or not we will have paid enough tax, eliminating his time and ours and the associated costs. Nor will we have to pay fines and use of money interest to the IRD for not paying the correct amount of tax, not because we don’t want to pay our tax but because our taxable income is generated in just 3 of the 12 months and we currently under the provisional tax law must be able to predict our income in advance - a practically impossible feat in the fickle horticulture industry. The Ratio method must also be a sensible option for IRD as it would receive tax promptly and regularly. There is however a limitation of the current Ratio method, which we would like to be reviewed and changed. This is the residual income tax range. This currently stands at between $2,500 and $150,000. I am suggesting that this upper limit be raised considerably or preferably removed.

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1 year ago
Mary Potgieter
Why can't the tax department tax the business one amount a year and the tax department must distribute the tax to where ever it must go eg; GST, Prov, IRD ECT

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1 year ago
Colin Sharp
Noone else pays provisional tax so why does business. You are trying to make money for everyone ie Wages, Rent, overheads. If for some reason you have a good year business is penalised. A good operator would put extra aside for growth and pay tax etc etc. Pay as you earn has some merit but do not suck the business dry. Abolish all penalties for business having a good year!!!

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1 year ago
Gene
It can be impossible to estimate your income especially when business activity or markets change. To add insult to injury with the penalty for getting it wrong is the disparity between interest rates on the UOMI of 8.4% and 1.75%. If this was more in line with market rates at say 6% and 4% this would befairer and not be so bad. That partnerships do not have the option of using the Ratio method is also unfair. Why is this? Another comments on the Canadian system which sounds good. Can this be verified and implemented here?

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1 year ago
ryan donnelly
i think provisional tax should be taken off the system .Its hard for the small business starting out having to pay two taxes in one year while trying to grow . that's why so many small bushiness don't make it in the two years .I had a small business in Australia and you pay as you earn , and they had free courses to help you out .

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1 year ago
Warwick Deverson
Provisional tax is horrible for small business. If income tax was combined with gst and paid on an as you earn basis would be much easier.

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1 year ago
Jim Huse
Why can't we have a company tax system the same as GST where organisations pay company tax on a monthly basis, based on payments within that month.

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1 year ago
KH
Because not everyone wants to do a taxable profit calculation every month (even if we could with any degree of accuracy) - we are busy enough trying to make a living

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1 year ago
David SUTHERLAND
My wife has her own business that sat on the threshold of provisional tax, some years it had to be paid and not others, this was hard as suddenly you had find money to pay the tax, yet we had never defaulted on our tax and always paid at years end. I think a better pay as you go system would be easier for those at this level of income.

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1 year ago
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