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Provisional tax helps manage income tax payment. Rather than paying a lump sum at the end of the year, you are able to make repayments throughout the year. There are 4 main options available to work out provisional tax:

 

Standard

 

Based on your previous year’s residual income tax (RIT) plus 5%. This is particularly useful if your income is steady or increases over the following year. If you choose the standard option, then you will pay 3 instalments throughout the year. Individuals registered for GST (filing biannual GST returns) will only pay 2 instalments. You may also be required to pay more tax after filing your returns. 

 

This option is selected automatically unless you specifically choose otherwise. 

 

Estimation

 

This option helps you avoid overpaying and underpaying your tax. It may be an ideal option if you already pay provisional tax and:

 

• Your income will be decreasing over the next year
• You suffer a loss which could drastically offset your income
• Your income is set to increase a lot and your RIT will be more than $60,000 higher than how much the standard option has calculated
• You have shifted from untaxed income (i.e. self-employment) to wages or salary

 

You must choose the estimation option if you’re choosing to be a provisional taxpayer but did not pay provisional tax last year. 

 

Account income method (AIM)

 

This option is available to individuals and companies with a yearly turnover under $5 million. This option is suitable if:

 

• Your business has been growing 
• You are new to business
• You have experienced a decrease in income from last year and find it difficult to estimate your income
• Your income is seasonal or irregular
• It is difficult for you to forecast your income accurately
• You have or want to start using accounting software

 

You only have to pay provisional tax when your business earns a profit – if your payments have been made on time and in full then no use of money interest will be charged

 

Ratio

 

Ratio option allows you to match provisional tax payments with business cash flow. I.e. your provisional payments are based on a percentage of your GST-taxable supplies. 

 

This option is useful if your income is varied or seasonal and you will need to meet various to select this option.