Demystifying Income Tax: Provisional vs. Terminal

P R O V I S I O N A L V S T E R M I N A L

D E M Y S T I F Y I N GI N C O M E T A X

W W W . P M A R T I N C A . C O M

P A U L M A R T I N C H A R T E R E D A C C O U N T A N T

T a x i s o f t e n a h e a d a c h e f o rb u s i n e s s o w n e r s . A s m u c h a st h e y w a n t t o a v o i d i t , t h e yc a n ' t b e c a u s e t a x i s p a r t o ft h e i r f i n a n c i a lr e s p o n s i b i l i t i e s . M a n y p e o p l ef i n d i t d a u n t i n g b u t o n c e y o uu n d e r s t a n d s o m e o f t h eb a s i c t a x f a c t s , y o u w i l l b em o r e p r e p a r e d t o d e a l w i t hi t .

T A XF A C T


A s a d e d i c a t e d t a xa c c o u n t a n t i n A u c k l a n d , w e

a r e s h a r i n g t h i s t a x o v e r v i e ws o y o u c a n b e t t e r u n d e r s t a n d

y o u r t a x o b l i g a t i o n s - w h i c hw i l l a l s o h e l p y o u m o r e

e f f e c t i v e l y m a n a g e y o u rb u s i n e s s f i n a n c e s .

T A XF A C T


I N C O M E T A XIncome tax is payable on the net taxable income of

the business. Broadly speaking it is computed basedon the difference between your business income and

your business expenses. However, there are someexpenses that you need to adjust when calculating

your taxable income - like entertainmentexpenditure. Talk to your accountant about these

special rules.


Y E A R 1If you are a start-up business, you will calculate your

net taxable income based on your net profit at theend of the financial year which in New Zealand is 31

March. Your net taxable income must be adjusted fornon-deductible expenditure. You don't have to worryabout this. Your accountant or does this calculation

for you.


Tax rates vary depending on thetype of business you have -

whether you are a sole trader, apartnership or a company. The

current IRD tax rates are:


T A X R A T E S

$ 0 T O $ 1 4 , 0 0 0( 1 0 . 5 % )

$ 7 0 , 0 0 1 P L U S( 3 3 . 0 % )

$ 1 4 , 0 0 1 T O $ 4 8 , 0 0 0( 1 7 . 5 % )

$ 4 8 , 0 0 1 T O $ 7 0 , 0 0 0( 3 0 . 0 % )

I n d i v i d u a l o r s o l e t r a d e r a n d p a r t n e r s h i p s

F o r c ompan i e s , i t i s a b i t d i f f e r e n t . A c ompan y ' s t a x a b l e i n c ome i s t a x e d a ta f l a t r a t e o f 28% . L i k ew i s e , t r u s t s a r e t a x e d a t a f l a t r a t e o f 33% .

Y E A R 2 O N W A R D SOne of the many misconceptions of first time

business owners is that they don't need to pay taxduring their first year in business. That is not strictly

true. The income of a new business cannot beproperly assessed in the first year because the first

year's accounts have not been completed. In fact,tax on the first year's profits is paid in the second

year.


Once there is a profit, the business is requiredto pay provisional tax during the next year.

The tax paid is based on the result of the firstyear, plus a 5% uplift for growth in the comingyear. Business owners can give an estimate oflikely profit for the next year ahead if it varies

significantly from the IRD's standardcalculation.


This means business owners have the burdenof paying tax on the first year's trading plus

provisional tax for the second year's trading intheir second year of business. We recommend

first time businesses start putting aside taxmoney in their first year as they go.


T h e t a x i s o n l y a n e s t i m a t eu n t i l a c t u a l n e t i n c o m e i sd e t e r m i n e d a t t h e e n d o f t h ef i n a n c i a l y e a r .

T h e p a y m e n t s a r e s p r e a do v e r t h e y e a r i n t h r e e e q u a li n s t a l m e n t s .

Y o u d o n ' t h a v e t o p a yp r o v i s i o n a l t a x i f y o u r t a xp a y a b l e f o r t h e y e a r i s l e s st h a n $ 2 , 5 0 0 .

PROVISIONALTAX


I t i s t h e f i n a l t a x t o p a y f o re a c h y e a r o f t r a d i n g b a s e d

o n t h e f i n a l p r o f i t r e s u l to n c e y o u r a c c o u n t s h a v e

b e e n c o m p l e t e d . R e m e m b e rp r o v i s i o n a l t a x i s p a i d b a s e d

o n e s t i m a t e d e a r n i n g s -t e r m i n a l t a x i s c a l c u l a t e d a s

t h e a c t u a l b a l a n c er e m a i n i n g . I t m u s t b e p a i d b y

t h e t e r m i n a l t a x d u e d a t e .

T E R M I N A LT A X


If you have the standard balance dateof 31 March, your terminal tax is due on

7 February, or 7 April if your taxaccountant filed for an extension

Remember, you need to cover yourprovisional tax throughout the year to

avoid a large terminal tax bill at theend of the year.


A S A T R U S T E DA C C O U N T I N G F I R M , W E

M A K E S U R E O U RC L I E N T S K N O W W H A TT A X T H E Y A R E P A Y I N G

A N D W H Y T H E Y A R EP A Y I N G T H E M

P A U L M A R T I N C H A R T E R E D A C C O U N T A N T

C O N T A C T U S(09) 576 4166

Level 1 The Lane, Botany Town Centre,588 Chapel Road, East Tamaki,

Auckland 2013

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Demystifying Income Tax: Provisional vs. Terminal

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