Understanding Income and Provisional Tax: basics you need to know
If accounting is not your cup of tea in a business owner’s busy life, but you still need to have a clear understanding of income and provisional tax and differences between them, you have come to the right place.
Income Tax
Income Tax is an amount payable on your earning, including:
- salary and wages
- bonus payments
- allowance paid by your employer
- a job you performed both in New Zealand overseas
- benefits,
- assets and investments,
- some prizes (over $500 in prize money)
- some volunteering work
When you are self-employed, we work out how much you need to pay at the end of the financial year, 31 March and, then your income tax is paid directly to IRD.
Provisional Tax
Provisional tax is paid throughout the financial year in instalments and incurred only when your first financial year has been completed. Due to the impact of Covid-19 on business in New Zealand, the threshold of the provisional trigger is now $5,000 for 2021. This is a permanent change; however, you still have an option to pay provisional tax even if it is under $5,000 in instalments to lessen the burden at the end of the year. At Spectrum Accounting, we discuss this with our clients, and they make the final decision.
You may have to pay provisional tax if you have a business, are self-employed, do contract or freelance work, receive income from rental properties, partnerships or receiving money from overseas.
Instalments during the year are based on what you expect your tax bill to be. What happens at the end of the financial year with provisional tax? The amount you have paid throughout the year is deducted from the total tax bill.
How to file your tax return and then pay it
If you keep track of your tax return yourself, you need to file it by 7 July. If you have an accountant or a tax agent, they may get an extended deadline.
Sole traders file an individual income return IR3, while companies need to file IR4. As for the partnerships, each partner files an IR3 and then the business files a partnership income tax return IR7. IR10 is used to provide a copy of the business’s income and expenses.
7 February of the following calendar year is the standard deadline for settling your tax bill for the year ending 31 March. However, accountants and tax agents may request an extension for you to pay the bill by 7 April.
At Spectrum Accounting, we are with you at every single step of the way. Some of the advice that we give our clients include:
- setting money aside and keeping it on a high-interest account
- while earning interest on the tax saving, by the end of the financial year, you might have a substantial amount to cover your ACC levies and other fees
- file and pay your tax on time every time so that you are not charged a penalty and interest on overdue payments
- keep a record of your income and expenses regularly
- calculate schedular payments on the amount after GST where applicable
Often a business is better served when accounting functions are fulfilled by an accountancy expert. That’s where we come in. Spectrum Accounting brings a wealth of knowledge and decades of experience across numerous industries but what sets us apart is the positivity, integrity, and work ethic underpinning our excellent reputation. Finding the right accounting partner is like waving a magic wand over the financial concerns of your business.
Contact us now and rest assured your tax management is under control.