Provisional Tax
What is Provisional Tax?
Provisional tax is a way of paying your income tax in instalments throughout the year, rather than in a lump sum at the end of the tax year.
When Do You Need to Pay Provisional Tax?
You must start paying Provisional Tax in the year after your tax bill (Residual Tax) exceeds $5,000.
Ways to Calculate Provisional Tax:
Standard Option
Straightforward but may be inaccurate if your income fluctuates.
Ratio Option
Aligns your tax payments more closely with your income.
Estimation Option
You estimate your income for the current year and pay provisional tax based on that estimate. Requires a good understanding of your income patterns and can be risky if you underestimate your income, as penalties may apply.
Accounting Income Method (AIM)
Provisional tax is based on the profit reported from Xero.
Recommendations:
We usually recommend the standard option if your income is stable. If no choice is made, the standard option will apply by default.
For fluctuating incomes, especially if you anticipate a decline, we recommend the ratio option. This choice must be made by March 31 for the upcoming tax year, so contact us urgently to discuss.
If your income is expected to be lower and you didn’t choose the ratio option, the estimation method may be used but be cautious. Underestimating your income can incur a 5% penalty. It's also difficult if your income is low at the start of the year but high at the end, as you’ll need to pay 1/3 of your taxes early without having earned that income yet.
Scenarios for Income Drops:
Life-work balance adjustments choosing to book less babies monthly.
Midwives taking maternity leave.
Extended leave or holidays.
Payment Dates for Midwives Filing GST Two-Monthly:
First Instalment: August 28
Second Instalment: January 15
Third Instalment: May 7
For six-monthly GST returns, payments align with GST return dates.
First-Year Payments:
Start dates depend on date we file your tax return as we have an extension of time for one year so can delay provisional tax.
Tax Advice:
Tax laws and obligations can be complex. Consulting with us provides tailored advice to ensure you meet all tax obligations. For further assistance or questions, please get in touch—we’d love to hear from you!
