Residual vs Provisional vs Terminal taxes – confused?

questions answered - different types of tax

If you’re not dealing with the subject every day, it’s difficult to understand, and you’re not alone!

We often find that when explaining types of taxes to clients, it seems logical and understandable. However, uncertainty creeps in later about why these taxes have different names.

Here’s a quick guide to the terminology.

Summary
Taxable Income (individuals)
Tax on Taxable Income
Tax Paid at Source
Residual Income Tax
Provisional Tax
Terminal Tax
Worked example

We always want to make things as clear as possible, but sometimes we can’t avoid using certain expressions. Our blog, What’s your accountant talking about?, sets out simple explanations and gives examples of how we may use the phrases.

Summary 

Let’s start from the end and work our way through the terms. There’s a worked example in the last section below.

  • Tax on Taxable Income – the total tax you need to pay, based on your taxable income
  • Residual Income Tax – tax to pay after deducting tax already paid by others on your behalf (for example, PAYE by employers and RWT by banks)
  • Provisional Tax – tax paid in advance for the current year to reduce your terminal tax bill
  • Terminal Tax – amount left for you to pay the IRD to clear the tax year

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Taxable Income (individuals)

First up – we need to know how much overall tax you need to pay as an individual taxpayer. This is based on your taxable income, which can come from a number of sources. We see the following income sources most often, but the list isn’t exhausive:

  • Salaries and wages
  • Schedular income
  • Shareholder salary
  • Business income (profit from your business if you’re a sole trader)
  • Investment income
  • Interest
  • Dividends
  • Government assistance
  • Superannuation

From here, we can deduct certain expenses:

  • Fees to prepare your personal tax return
  • Income protection insurance (not health insurance)

The result is your Taxable Income.

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Tax on Taxable Income

Once we have your individual taxable income, we calculate the tax. Inland Revenue sets the tiers and percentages – we’ve included a few examples below.


And so, we arrive at your Tax on Taxable Income.

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Tax Paid at Source

Before the money even hits your bank account, others* are deducting tax from your income (on your behalf) and forwarding to the IRD.

Tax has already been paid by these sources, so you don’t need to pay it again.

This is deducted from your Tax on Taxable Income.

* Including your employer, bank, companies paying you dividends, Kiwisaver and other investment funds

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Residual Income Tax (RIT)

RIT is what’s left to pay after deducting taxes withheld (and paid on your behalf) before you even see the money. If you have any donation credits, we can use them to reduce your tax bill.

Tax on Taxable Income less Tax Paid at Source less Donation Credits = Residual Income Tax

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Provisional Tax

If your Residual Income Tax (RIT) is higher than $5,000, you fall into the provisional tax regime.

This is probably the most difficult to get your head around. You’re thinking about the current tax year, but we’re asking you to pay tax for next year! We’re making sure you meet the Inland Revenue’s tax requirements and keeping any interest and penalties charged to the bare minimum – preferably nil.

What you’ve been (hopefully) doing, is paying the requested amounts to reduce your final 2022 tax payable to Inland Revenue.

Here’s where the timing gets confusing.  For the 2022 tax year, your provisional tax payments will have been August 2021, January 2022, and May 2022. Your final tax bill for the 2022 year will be due in April 2023 or February 2023**.

For the 2023 tax year, we’ll be asking you to pay as follows:

  • August 2022, January 2023, and May 2023*.
  • The final wash-up (terminal tax) will be due in April 2024 or February 2024**

It feels like you’re paying tax all the time, and you probably are! We have a separate blog explaining the timing.

IRD requirements for provisional tax

The standard requirement is for the taxpayer to pay the prior year RIT (see further below) plus 5%. If that prior year return hasn’t been filed, they’ll go back to the year before that, plus 10%.

* Except if you prepare your GST returns every six months
** If you don’t have Extension of Time

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Terminal tax

The remaining 2022 tax to pay on 7 April 2023 (or 7 February 2023) if you don’t have the Extension of Time).

It’s your Total Tax to Pay less Tax Paid at Source (by others) less Provisional Tax (tax you’ve paid in advance for that income tax year).

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Worked example

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