How to manage your provisional tax
Budgeting for tax is critical for any small business – especially for owners in their first few years of business. New businesses are asked to pay tax on their first year’s taxable income at the same time they’re asked to start paying provisional tax on next year’s income. Established businesses can also feel the pinch around tax time if they don’t have a plan for how they’ll deal with provisional tax instalments when they’re due.
To make it easier for small businesses to manage these payments, Inland Revenue introduced the GST Ratio Method in 2009. This enables businesses to pay their provisional tax when they pay their GST every two months. It spreads the cost over six payments rather than the three instalments required under the standard provisional payment model.
Under this method, provisional tax would be payable with every two monthly GST return or alternate GST return if you are a monthly filer. As provisional tax is based on your sales for the two month period, you will either pay more or less provisional tax depending on your level of sales.
The option is particularly good for businesses who have volatile or seasonal cashflow and who want to avoid paying large amounts of tax when cashflow is low. In fact, many business owners decide this option is for them because they simply prefer spreading their payments and aligning them with their sales – it’s just easier to manage their cash flow.
Another benefit of the GST ratio method is if you haven’t paid enough provisional tax in the end of year “wash-up”, you won’t be charged Use of Money interest at year end.
While attractive, the option isn’t for everyone. We suggest coming to see us to discuss if this is the right option for you.