New Provisional Taxpayers Beware

Changes to the provisional tax regime, effective from the 2018 tax year, have generally been well received by taxpayers.

Prior to the change, Inland Revenue charged interest from each provisional tax date if a taxpayer’s actual liability exceeded their ‘uplifted’ amount from prior year(s). This effectively meant taxpayers were required to predict their full year results as early as five months into the year. Now, providing payments are made under the standard uplift method, no interest is payable – providing any excess tax is paid by the third provisional tax date where tax payable is over $60k, or by terminal tax date where Residual Income Tax (RIT) payable is less than $60k.

However, there is a caveat for “new provisional taxpayers”. IRD have released “Questions we’ve been asked” 19/04 for taxpayers in their first year of business. If the first year’s tax liability exceeds $60,000, then the ‘Use of Money Interest’ (UOMI) concession is not available, and will apply to from the first provisional tax date, as per the old rules.

For example, where a large business is restructuring and diverges part of its business into a new company, the new company cannot rely on having a nil standard uplift liability, so if RIT exceeds $60,000 interest will be charged on any tax shortfall from each provisional tax date. New taxpayers should pay heed of this rule to avoid unexpected interest charges in their first year.