Let’s talk about what smart business owners do (and don’t do) when provisional tax dates come around.
The Dos
Do stay ahead of the dates.
Know your dates and put them in your calendar. Set a reminder two weeks before. The IRD’s late payment interest and penalties are avoidable, and there’s nothing more frustrating than paying extra simply because you forgot. Your dates will be different depending on what your year-end is – 31 March year end with Extension of Time is 28 August/15 January/7 May. (You will receive a copy of your tax summary from us that has these dates on it).
Do use tax pooling. Seriously, if you’re not, why not?
Tax pooling is arguably the best tool in a NZ business owner’s toolkit that most people still aren’t using. With the tax pool you can buy back tax you’ve missed or save along the way ready for a known future payment. The key is that you avoid IRD’s penalties (which can rack up). If you overpay, you can save the funds for another tax date and earn interest on them when you finally use them. It’s a legitimate, IRD-approved arrangement, and it can seriously save on IRD interest and penalties.
We use Tax Traders as our agent, and we actively recommend to our clients. The interest rates for buying back tax are better than IRD rates, and the flexibility it gives you around cash flow is genuinely valuable.
Do review your income before each instalment date.
The standard uplift method applies to most tax payers, but it’s not always correct. If your income has dropped, maybe you’ve had a quieter year, made big investments, or taken on new debt, you could be overpaying provisional tax. You won’t get overpaid taxes back until you file the next income tax return. Do let us know of any significant changes so we can run the numbers before each instalment, not after.
Do talk to your accountant
Here at Engine Room, we don’t just “pay what it says”. We review your income but still need to hear from you if something has changed. If we’re not aware of your change in circumstances, then we can’t be as accurate as we need to be.
We like to make a tax plan that you understand and keeps you on track. Your Engine Room accountant can help you figure out whether you should pay more, less, or look at restructuring via a tax pool. Five minutes of conversation could save thousands.
The Don’ts
Don’t ignore provisional tax because it feels far away.
“I’ll sort it next month” has cost a lot of business owners a lot of money. The issue with provisional tax is that by the time it hurts, it’s already too late to do much about it. The time to act is before the instalment date, not the day after. A basic tax provision (setting aside a percentage of your income each month) means the money is already sitting there when the bill arrives. We can help you calculate a realistic percentage based on your business.
Don’t assume last year’s figure is still right.
Business changes. A year is a long time. Using the prior year’s residual income tax as your benchmark when your income has materially changed is one of the easiest ways to either overpay (bad for cash flow) or underpay (bad for your wallet when IRD interest kicks in). Neither is a good outcome.
Don’t pay penalties when you don’t have to.
This is the big one. IRD’s use-of-money interest rate is set above the market rate, and it compounds. Penalties can also still compound if you pay late but with tax pooling, you avoid penalties altogether.
Don’t confuse “I can’t afford it” with “I need to plan better.”
Sometimes cash really is tight, and that’s a real conversation to have. But often, what looks like a cash flow problem is actually a planning problem. Tax pooling, provisional tax estimates, and even structured payment options all exist to help. The earlier you talk to us, the more options you have.
What’s your plan?
How you pay, when you plan for it, and what tools you use is entirely within your control.
If you’re not already using tax pooling through us, let’s talk. It’s one of those things where the upside is real and the effort is minimal. And if you’re just not sure whether your current approach is working for you, that conversation is worth having too.
Get in touch and let’s make sure provisional tax isn’t working against you.
Email us on info@engineroomca.co.nz or call our office on 09 238 5939.
