Quick introduction to provisional tax

Provisional tax is designed to help you pay the tax you owe upfront on the income you are earning during a financial year. Instead of paying one large lump sum at the end of each tax year, payments are broken down into two parts during the course of the assessment year, with an optional third payment. This makes meeting your tax liabilities a lot easier and has less impact on your cash flow. It does however require you to make accurate predictions of your income as the provisional tax payments are made before all income is received or earned.

For example, the financial year runs from the beginning of March to the end of February the following year. During that time you need to make two payments, one for the first 6 months (ending 31 August) and one for the second. As it is advised to pay early, it requires accurate predictions of your income as incorrect estimations can result in penalties. They do however allow for some variance in this estimation but the reason for the penalties is to discourage low income estimations in the first 6 months ( i.e. an attempt to avoid paying tax in the first half of the year ).

You can read more about provisional tax in my blog What is Provisional Tax?.

Do I need to pay Provisional tax?

If you receive income from any source other than a salaried job, you are required to pay provisional tax. If you have anything that generates an income such as a small side business, a property you rent out or interest generated from investments, you need to declare this income and meet the provisional tax timelines below:

  • Your first provisional tax amount needs to be paid in the first 6 months of the year of assessment.
  • Your second amount needs to be paid before or on the last working day of the year of assessment.
  • The third payment can be used if you have a shortfall to make up in your first two payments but is entirely voluntary. Only the first two payments are required

How do I calculate provisional tax?

Using the steps below you can calculate the provisional tax you are eligible to pay:

As the first provisional tax payment is due before August 31, you should know most of your income up to that point and possibly only have to estimate for the last few weeks in August.

You can start by noting your income from 1 March to 31 August. Then total your expenses for this period.

Now you will need to estimate your income for 1 September to 28/29 February and also total your predicted expenses for this period.

By adding all your income, both actual and predicted, you will work out your gross income for the year. Then total all your expenses and you will have a figure for your gross deductions.

To work out your taxable income for the year, subtract your gross deductions from your gross income.

Using the tables listed on my previous blog 2013 Tax tables, you can calculate your tax for the year.

You should have a figure for your tax. Look up the annual rebate you are eligible for and subtract this from the tax figure. This is your tax liability for the year. Divide this by 2 or in half and you have your provisional tax payment figure.

Provisional tax help.

While the above steps will provide you with a guide on how much provisional tax you will need to pay, we recommend contacting a professional who can advise you on expenses you can and can’t claim for, allowing your provisional tax payments to be accurate and specific to your type of business.

Should you need advice, contact professional tax consultant Brett on 021 421 4444. Known for his friendly approach and affordable rates, he can add value to the provisional tax process and take the stress out of calculating and submitting provisional tax returns.