What is Provisional Tax (New Zealand)?
Provisional tax is income tax paid in instalments during the year rather than all at once after filing. The standard method sets each instalment at one-third of 105% of the prior year's residual income tax. Three instalments fall due on 28 August, 15 January and 7 May.
Current Rate (1 April to 31 March. Three provisional tax dates per year.)
Based on 105% of prior year residual income tax (standard method). Safe harbour applies if prior year residual income tax was under NZD 60,000.
Example
A company paid NZD 90,000 residual income tax last year. Its provisional tax for this year is NZD 94,500 (105%). Each of its three instalments is NZD 31,500, due 28 August, 15 January and 7 May.
How Provisional Tax (New Zealand) works in New Zealand
Provisional tax is the mechanism by which IRD collects income tax during the income year rather than waiting until the return is filed. It applies to anyone whose residual income tax (RIT) for the prior year exceeded NZD 5,000 (the threshold below which terminal tax covers all liability).
**Three Methods**
The standard method is the default: each instalment equals one-third of 105% of the prior year's RIT. If this is the taxpayer's first year of provisional tax, the rate is 110% of the prior year RIT. This is simple but can result in over- or under-payment if income changes significantly year-to-year.
The estimation method allows the taxpayer to estimate their current-year RIT and pay one-third of that estimate at each instalment date. This is useful when income is materially lower than the prior year. However, if the estimate turns out to be too low, use-of-money interest (UOMI) applies to the shortfall from each instalment date.
The accounting income method (AIM) is available to taxpayers with turnover under NZD 5 million using AIM-capable accounting software (such as Xero or MYOB). Under AIM, provisional tax is calculated based on actual accounting income in the relevant period and paid more frequently (bi-monthly). AIM avoids UOMI entirely because payments are aligned with actual income.
**Safe Harbour** Taxpayers whose prior year RIT was less than NZD 60,000 benefit from the safe harbour: provided they pay the standard method instalments in full and on time, no UOMI applies even if their actual tax for the year turns out to be higher. They simply pay the balance as terminal tax. This removes a significant risk for small businesses with volatile income.
**Use-of-Money Interest (UOMI)** Where provisional tax is underpaid (actual liability exceeds instalments), IRD charges UOMI from the first instalment date at which the shortfall arose. The rate is set by regulation and has historically been between 7% and 10% per annum. Overpayments earn interest at a lower rate. UOMI is not deductible.
**Terminal Tax** After the year-end return is filed and the final RIT calculated, any balance not covered by provisional tax becomes terminal tax, due 7 February (for standard balance date taxpayers) or 7 April for those using a tax agent.
**Instalment Dates for Standard Balance Date (31 March)** First instalment: 28 August (5 months into the tax year). Second instalment: 15 January (9.5 months in). Third instalment: 7 May (37 days after year end, shortly after the terminal tax date for the prior year).
Related terms
New Zealand companies pay a flat 28% corporate income tax rate on net taxable income. Maori authorities pay 17.5%. The imputation system prevents double taxation by attaching tax credits to dividends paid to shareholders.
The IR4 is the annual income tax return filed by New Zealand companies. It reconciles accounting profit to taxable income by adjusting for non-deductible items and IRD depreciation differences. Due 7 July for standard 31 March balance date companies, or 31 March following year via a tax agent.
An IRD number is the 8 or 9-digit tax identification number issued by Inland Revenue to individuals, companies and other entities in New Zealand. It is required to pay tax, employ staff, register for GST, and open a business bank account. The NZBN (NZ Business Number) is the separate 13-digit public business identifier.
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