Understanding New Zealand's provisional tax system

Provisional tax is where you pay your income tax in instalments throughout the year, rather than in one giant lump sum after the year ends.

If you run a business or receive other income that isn’t taxed at the source (like rental income), provisional tax kicks in once your tax bill for the previous year exceeds $5000.

You might be asking, “But why do I have to prepay my tax?”

When you’re an employee, your employer deducts tax automatically every pay period via Pay As You Earn (PAYE). As a business owner or landlord, tax isn't usually paid as income is earned. Settling your bill in one go at the end of the year creates two main issues:

Provisional tax solves this by breaking your income tax into smaller payments throughout the year, followed by a final "wash-up" payment called terminal tax. Here is how it works and how to manage it without straining your cashflow.

The standard method takes your previous year’s tax bill and adds a percentage (5%) to guess your current year’s tax. If your previous year's tax return has not been filed, then it is the year before that plus 10%.

For example, if last year’s tax bill was $20,000, your provisional tax total for the current year will be $21,000 (i.e. $20,000 + 5%). This amount is then spread across 3 equal instalments (or 2 if you’re on 6-monthly GST filing).

The main benefit of this method is that if your tax bill is under $60,000 and you pay your instalments in full and on time, you won’t be charged interest or penalties if your actual income tax for the year comes out higher.

With the estimation method, you advise the IRD of your estimated income tax for the upcoming year and make payments accordingly.

If your estimate is incorrect and your actual tax bill turns out higher, the IRD will charge interest and short-fall penalties. For this reason, we prefer the Standard method, unless there has been a confirmed change of circumstances (for example, you have ceased business, or left NZ).

With AIM, provisional tax is calculated based on actual year-to-date profits and considers depreciation, stock on hand, shareholder salaries and other non-cash items that impact profit.

This method can only be used if your annual turnover is less than $5 million and you use AIM-compatible accounting software (like Xero). It’s best suited for those with highly seasonal businesses or cashflow that fluctuates (like farming or tourism), as you only pay tax in periods where you’ve made a profit.

Under the ratio method, provisional tax is calculated as a percentage of your GST taxable supplies (the percentage is set by the IRD based on your prior tax returns).

For example, if the allocated percentage is 20% and your GST sales for the last 2 months came to $84,000, then your provisional tax payment for that period would be $16,800.

This method is rarely used as it requires you to inform the IRD prior to the start of the financial year and can not be used retroactively. There are also other eligibility criteria, which can be found on the IRD website.

The exact payment deadlines depend on your year-end date, the calculation method and your GST filing frequency. 

For a standard 31 March year-end, we’ve outlined the dates below.

For most provisional taxpayers, there are 3 instalments:

However, if you file GST 6-monthly, you only have 2 instalments, which are due by 28 October and 7 May. (These are the same dates as your GST returns).

Payments are often due at the same time as each GST return (unless you're registered for 6-monthly GST).

If you file monthly, then this will be monthly. If you file 2-monthly or 6-monthly (or aren’t registered for GST at all), then provisional tax is calculated every 2 months.

With the ratio method, your provisional tax is typically calculated and payable in 6 instalments.

Terminal tax is the final ‘wash-up’ payment that is due after the financial year has finished.

After year-end, when your final financial statements are prepared, your income tax for the year is calculated.  This is based on all income sources including wages, rental income, business profit, shareholder salary, interest and dividends.

Any income tax that you’ve already paid during the year is deducted from the total (e.g. provisional tax, PAYE, Dividend Withholding Tax).

*In most situations, the IRD won’t refund if you have other tax debt. Instead, they’ll offset the amount of what would be refunded against the other tax you owe.

If you have Extension of Time (EOT), terminal tax is due in April the following year (e.g. April 2027 for FY 2026).

If you don’t have EOT, terminal tax is due in February the following year (e.g. Feb 2027 for FY 2026).

For Beany clients, these payments are displayed in your client portal so you don’t need to memorise any dates. We also send out provisional tax alerts so you know how much to pay and when.

When it’s your first year in business, you typically don’t pay any income tax during the year as you don’t have a prior year’s tax bill exceeding $5000. Instead, it hits you in the second year.

This is where many new business owners get caught out. Due to the timing of these payments, your tax for year 1 and provisional tax for year 2 fall within the same 10-12 month window, which can put a strain on cashflow if you haven’t been setting money aside for tax obligations.

For example, if your first year in business was FY2026 and your provisional tax uses the standard method, your pending deadlines would be as follows:

At Beany, we provide a breakdown of provisional tax instalment amounts and remind you before payment dates hit, so you can focus on the business, not what tax is due and when.

Get in touch with us to discuss your accounting requirements and explore how we can help support your business.