Libby O'Toole, Customer Experience Specialist
No one should be filing a provisional tax estimate.
The major downside of doing so is that it exposes your client to the full use-of-money interest (UOMI) regime, meaning they can be significantly penalised if they experience a late or sudden upswing in profitability, or if their liability is reassessed in the future. And that can happen easily, given estimates are made at the start of the year, when it’s too early to know how things will play out.
A smarter approach is to stick with standard uplift (even if your client expects to earn less income than the previous year) – but have your client pay provisional tax in line with real-time business performance and then use the tax pool to address any shortfalls at year-end once their position is known.
UOMI and late payment penalties (LPP) are calculated retrospectively by Inland Revenue, comparing uplift with actual once you file your client’s income tax return for the year.
When a client using the estimation method with residual income tax of more than $5,000 underpays provisional tax, UOMI is charged at each instalment date where there is a shortfall. The shortfall at each date is based on a third of their RIT for the year, minus any amount paid in relation to that instalment.
However, for standard uplift taxpayers outside safe harbour (i.e. RIT of $60,000 or more), UOMI and LPP at the first and second provisional tax instalment dates are incurred if tax is underpaid on the lesser of:
Interest at the date of final instalment is charged on any outstanding balance for the year. (Note: late payment penalties at the final instalment under standard uplift are charged on the lesser of uplift or a third of actual.)
We recently saw this play out in practice.
A client filed an estimate early during the 2025 year on the basis that their income would be down – only for their profitability to end up significantly higher than the previous year due to a couple of big deals landing sooner than anticipated. Because they had used the estimation method, they were exposed to full UOMI at each instalment date based on a third of actual RIT, leaving them with a much higher interest cost than if they had simply stayed on standard uplift.
In this situation, sticking with standard uplift would’ve provided a meaningful UOMI concession. The shortfall on which UOMI would’ve been charged at the first and second instalment dates would’ve been based on the difference between the uplift amount due and what the client paid.
The remaining UOMI would’ve been charged from the date of final instalment on the remaining balance to satisfy their liability for the year.
If your clients have provisional tax shortfalls, these can be topped up to the appropriate level at each instalment date, reducing their interest cost and eliminating late payment penalties.
We also recommend depositing provisional tax payments into the Tax Traders tax pool throughout the year, as this provides additional flexibility not available to those who pay Inland Revenue directly.
This includes enabling your clients to use their provisional tax deposits as security to access affordable working capital through our sibling company, Taxi – with rates around half those of a major bank overdraft.
Feel free to give us a call if you’d like to know more about how Tax Traders can help you mitigate downside provisional tax risk for your clients.