Businesses in New Zealand pay income tax on their net profit earned in any specific tax year. For most businesses, the tax year runs from 1 April to 31 March but businesses can apply to the IRD for this to be changed.
A provisional taxpayer is a person or a company that had a residual income tax of more than $2500 in the previous financial year. There are three options for paying provisional tax; standard method estimated method and GST Ratio option.
Under the standard method, provisional taxpayers make three provisional tax installments through the year based on the previous year’s tax liability.
The standard method is the most common method. However, a provisional taxpayer can choose to estimate their provisional tax payments. Estimation allows the business owner to pay less or more tax depending on how they think their business is performing. Any underpayment is subject to interest, and no interest is paid on an overpayment, so it is important that they estimate their profit accurately.
A provisional taxpayer can also pay provisional tax using the GST ratio option. This is based on what your previous year’s residual tax liability was and what your GST Taxable supplies were for that year.
You then apply this percentage to your current period GST return. Under this option, you pay provisional tax at the same time as you pay GST.
At the end of the year, the business files a tax return (due on the following 7 July for businesses with a tax year ending 31 March), and any under or overpayment is then calculated.
Tax pooling was introduced in 2003 to remove some of the worry associated with estimating provisional tax payments by allowing businesses to pool their payments together so the underpayments by some can be offset by the overpayments of others to reduce/enhance the interest they pay/receive.
Companies pay income tax at 28% on profits. Tax rates for individuals operating as a business (that is, individuals who are self-employed) are the same as for employees.
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