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Is my client liable to pay provisional tax and use-of-money interest in their first year of business?

Hamish MacDonald, Client Services Expert

 

 It depends on your client’s residual income tax (RIT) for the year. 

RIT of less than $60,000

 

If you or your client has not filed an estimate for the year, then no – they won’t be liable to pay provisional tax or UOMI.

 

  • Their RIT will be due on their terminal tax date for the year.
  • UOMI and late payment penalties will apply after this date if their liability has not been paid by then.

RIT of $60,000 or more

 

The answer is yes if they meet the criteria for being considered a ‘new provisional taxpayer’.

 

How many interest instalments they’re liable for will depend on the date they started their business.

 

For those with a 31 March balance date, this will generally be:

  • Three instalments if they started trading before 29 July.
  • Two instalments if they started trading on/after 29 July but before 16 December.
  • One instalment if they started trading on/after 16 December.

 

The tax amount on which UOMI is incurred is calculated as follows:

  • RIT divided by the number of interest instalment dates for the year (either three, two or one, depending on when your client started trading).  

 

A note on the definition of ‘new provisional taxpayer’

 

The definition of ‘new provisional taxpayer’ is defined in section 3 of the Tax Administration Act 1994 and references the definition of ‘initial provisional tax liability’ contained in section YA 1 of the Income Tax Act 2007.

 

Please note that new provisional taxpayer criteria differ slightly for companies and individuals.

 

For the purposes of determining an ‘initial provisional tax liability’, the definition of ‘taxable activity’ is the same as that in section 6 of the Goods and Services Tax Act 1985. However, unlike for GST, taxable activity for provisional tax purposes also includes the making of GST exempt supplies.

 

How Tax Traders can assist

 

If your client’s RIT during their first year of business is $60,000 or more, Tax Traders’ RIT Tool can help you determine the tax amounts your client requires at each date to reduce their UOMI exposure.

 

You have up to 75 days after your client’s terminal tax date to organise and transfer any top-ups your client requires.