As an employee, taxes are relatively straightforward:
For business owners, it’s not so simple. Predicting your tax obligations throughout the year can be tricky because your business income—and by extension, your personal income—can fluctuate significantly.
One of the most common questions we get asked at Mondo Advisory is, “How does provisional tax work?” So, we’ve put together this guide to break it all down for you.
At its core, income tax for business owners is paid in one of two ways:
If your residual income tax is under $5,000, you’ll generally pay it in one lump sum. But if your residual income tax is over $5,000, the Inland Revenue Department (IRD) requires you to pay in instalments. This system is called provisional tax.
Income tax is a broad term, but the way it’s paid is where different names come into play:
For most businesses, the tax year runs from 1 April to 31 March, aligning with the financial year.
By default, IRD calculates your provisional tax using the standard uplift method, which adds 5% to last year’s residual income tax. If you have not filed your previous year’s tax return, a standard uplift of 10% will be based on your residual income tax from two years prior, until the return is filed.
There are other methods to calculate provisional tax, but the standard method is the most common. Another method is the estimation of your provisional tax. Simply put, this involves estimating the total taxable income you anticipate receiving and calculating the estimated residual income tax, which forms the basis for your provisional tax payments. You can re-estimate your provisional tax as often as needed up to third (final) instalment date, but it is crucial to ensure that your estimate is fair and reasonable to avoid penalties. If your estimate is too low, you may incur use-of-money interest and potentially face shortfall penalties if the estimate is deemed unreasonably low.
It’s common for the standard uplift method to result in either underpayments or overpayments.
Provisional tax is typically paid in three instalments, but the exact dates depend on your balance date and GST filing frequency.
For most business owners with a 31 March balance date, the key dates for the 2025 tax year are:
For GST-registered businesses using the ratio method, provisional tax may be paid in six instalments throughout the year.
Yes, you must pay tax on income earned in your first year of business. However, your first payment isn’t due until after you’ve filed your tax return for that year.
For example:
Accurate income forecasting is key to managing provisional tax effectively. Regularly review your financial performance and adjust your tax estimates as needed.
At Mondo Advisory, we help business owners navigate provisional tax and maintain healthy cash flow. If you’re feeling overwhelmed or need guidance, we’re here to help. Let’s make tax less stressful so you can focus on growing your business.