IR3 Question 35 Provisional tax

Provisional tax is generally payable because you earned income during the year that either:

wasn’t taxed, or
was taxed at the wrong rate.

It’s usually payable in three instalments during the year (28 August 2019, 15 January 2020, 7 May 2020), unless:

you have a non-standard balance date, or
you pay GST on a six-monthly basis, or
you use the GST ratio method to calculate provisional tax.

If your 2019 residual income tax (RIT) (Box 32A of your return) is more than $2,500, you’ll become a provisional tax payer and will be liable to pay 2020 provisional tax.

For more information read the guides Provisional tax (IR289) or Penalties and interest (IR240).

Initial provisional tax liability

Special rules apply when interest may be charged for an initial provisional tax liability.

You will have an initial provisional tax liability if:

you begin to derive income from a taxable activity during the tax year, and
your RIT in any of the four preceding tax years didn’t exceed $2,500, and
your RIT for the current year is $50,000 or more.

If this applies to you, please read the guide Provisional tax (IR289).

The date you cease employment determines when interest will be charged from.

You are not liable to pay provisional tax in the year you have an initial provisional tax liability. You may make voluntary payments to reduce your interest liability.

Interest rules if you have an initial provisional tax liability

Special rules apply to when interest may be charged for an initial provisional tax liability. If this applies to you, please read the guide Provisional tax (IR289).

Payment options

You have three options for paying provisional tax—the standard option “S”, the estimation option “E” or the ratio option “R”.

Standard option

Under this option, your 2020 provisional tax is the same as your 2019 RIT (if it is more than $2,500) plus 5%. Copy this amount to Box 35B of your return and print “S” in Box 35A. Divide the amount by 3 to get the amount you must pay for each instalment - record this on page 51. If you’re filing your return after 28 August, your instalment amounts may be different.

If you think your income for 2020 will be more than your 2019 income, you can make voluntary payments over and above the amount you have to pay under the standard option.

Estimation option

Anyone can estimate provisional tax. If you expect your 2020 RIT to be lower than your 2019 RIT, estimating will keep you from paying more than you have to.

If you choose to estimate, your estimate must be fair and reasonable at the time you make it and at each instalment date.

You can be charged a penalty and/or interest if you don’t take reasonable care when you estimate your provisional tax.

Ratio option

If you’re GST-registered you may qualify to use the ratio option to calculate your provisional tax.

You must apply to use the ratio option, before the beginning of the income year you want to use it in.

If you’ve already elected to use the ratio option and want to continue using it, enter R at Box 35A.

Read the guide Provisional tax (IR289) for more information about the ratio option.