Provisional tax can be a headache, having to know how much to pay for the coming year and having the cash available to make the payments at the right time of year, can be a worry for any small business.
In an attempt to make life easier for small businesses, the IRD are changing the way we file and pay provisional tax by synchronising it with the GST Return as of 1 April 2008.
The main change for small businesses is the Ratio Option, which will be described in more detail below. Even if this doesn’t apply to you, you’ll be happy to know that the new company tax rate of 30% is now in effect – so at least if it’s not easier to file your tax, it should be easier to pay it!
- GST and provisional tax due dates have been combined
- There is a new GST and provisional tax return (GST103B) so you can work out and pay your GST and provisional tax at the same time
- There is a new way to work out your provisional tax installments: The Ratio Option
- GST refunds can now be used to offset provisional tax payments
What is the Ratio option?
The ratio option is designed to simplify provisional tax for small businesses. It allows your provisional tax to be calculated based on the income you declare in your GST returns. It allows you to synchronise provisional tax payments with your GST payments, based on the timing of when you receive your income. You can choose this option if:
- You have been in business and GST registered for two full tax years
- Residual income tax for the previous year is greater than $2,500 and up to $150,000
- GST returns are filed every month or two months
- Your business is not a partnership
If you don’t qualify for the ratio option, then you will continue calculating and paying your provisional tax as you currently do, except you can now file it as part of your GST Return.
How will Xero support these changes?
- We have updated our ‘one-click’ GST return to allow you to include your Provisional Tax. This will be available in time for the first provisional tax return in May
- If you are eligible for the ratio option, then you can enter your Provisional Tax ratio into Xero. After that, Xero will automatically calculate your provisional tax payments for you
- You can publish your GST and provisional tax returns in Xero, allowing you or your adviser to easily review them at a later date (you still need to file your return manually with the IRD)
To find our more information about these changes, visit the IRD website talk to your financial adviser.
Disclaimer: You should always seek the advice of your financial adviser before making any decisions in your business.