Provisional tax is simply paying tax as you go throughout the year, rather than one lump sum at the end of the year. It was designed to reflect that most businesses earn their income over a year, so tax should be paid in a way that matches that.
Provisional tax is paid in 3 instalments. This means 3 payments rather than 1, which can help with cash flow.
In year 2 of business it can sometimes feel like you’re paying double tax. Let’s take a look at an example to see how that works
If your tax bill for the previous year is greater than $5,000 you will become a provisional taxpayer. In this example the first year of business was the 2021 tax year, and the tax return showed a bill of $30,000 which is due for payment on April 7 2022. Because this is over the $5,000 threshold, the taxpayer needs to start paying provisional tax, for the 2022 tax year, as the year is in progress. The three payments are due 28 August, 15 January and 7 May.
The taxpayer also has to pay that 2021 tax bill on 7 April. So it can feel like two years worth of tax is paid during one year.
The good news is that provisional tax is meant to eliminate the 7 April final payment. So in year 3 of business the taxpayer should only have the three provisional payments to make.
In summary, provisional tax helps to spread your tax payments over the year as you earn your income. In the second year of business you pay tax for both year’s 1 and 2 but after year 2 your provisional tax should pretty much cover your tax bill for the year.
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