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Changes to Provisional Tax Rules - April 2017

Provisional Tax

From the 1st April 2017, or balance date, there has been great changes to provisional tax. The thresholds for companies trusts and individuals have been lifted from $2,500 to $60,000. In addition, interest for all tax payers will only apply for tax payers with residual tax over $60,000, from the third instalment date, and will run until the tax is paid. Tax payers with residual tax below $60,000 will, under normal circumstances, not pay interest.

We set the basic position as follows:

Provisional Tax Changes from 1st April 2017

Previous Rules:

Use of money interest applied if residual income was over for

  1. Individuals $50,000
  2. Companies $2,500
  3. Trusts $2,500 (on trustees Income)

This was applied at a current rate of 8.33% per annum from the first instalment due for that year’s provisional tax.

For example 31st March 2017 Balance Date from:

            28th August 2017

            15th January 2018

            7th May 2018

In addition, penalties applied for late payment of standard uplift payments. These payments could be reduced by purchasing tax from a tax pooling intermediary who charged about 6%, but could back date payments to reduce interest and penalties if paid by the final date.

New Rules:

Provisional Tax threshold for interest charges is now $60,000 residual tax for Individuals, Companies and Trusts from 1st April 2017 or equivalent balance date.

Those tax payers with residual tax over $60,000 will have interest charged from the final instalment date (7th May 2018 for a March balance date).

Requirements to pay provisional tax remain as follows:

  1. 10% uplift on previous years residual tax (2016) where a tax return for 2017 has not been filed.
  2. 5% uplift on 2017 residual tax where a return has been filed.

There are some new provisions regarding anti avoidance to stop companies, trusts and individuals chopping and changing to get the benefit of this, and leaving money in the company and in the next year paying it as salaries or trust distributions. As long as a consistent approach is made, there are considerable savings and less administration work for a large number of tax payers. Those with residual income tax will generally be able to pay a best estimate on residual income tax likely to be over $60,000, as quickly as possible.

Tax can also still be purchased at a later date through a tax intermediary whose interest rates are about two thirds of those of Inland Revenue.

This change is great news as there are companies and trusts currently with residual income that have been previously caught with use of money interest as a result of residual income tax over $2,500. It will mean use of money interest will only apply after the normal due date, except where residual income tax is over $60,000 and the interest rate will commence on the last day for provisional tax payment.

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