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The word “tax” typically isn’t music to anyone’s ears, but there is a tax that makes our lives easier. We’re talking about provisional tax, which lets us spread our income tax payments across the financial year, rather than make one crippling payment at the end.
Time to read: 5 mins
The key components of this are:
There is always a distinction between net profit and cashflow. Just because you don’t have money in the bank doesn’t mean that your business isn’t profitable and therefore doesn’t have tax to pay; rather it may mean your profit has been applied to something else. Have a chat to your business advisor if you are struggling to understand why you have tax to pay, yet little cash available.
The standard provisional tax method works as follows:
It is important to note that this formula approach results in a provisional tax estimate rather a final tax for the year. Upon filing your income tax return at the end of the year, you receive a credit for your provisional tax payments made during the year.
Should your actual tax to pay be greater than your provisional tax payments, you will have additional tax to pay, however if your tax to pay is less than your provisional, you will receive a refund of the overpaid portion.
The saying that your first year in business is tax-free is sadly a myth, as any income is subject to tax. However, you won’t be obliged to pay provisional tax in the first year, as your tax to pay in the prior year was less than $5,000.
Being new to business, it can be easy to overlook your tax obligations, but it’s essential to plan for them. As an example, let’s assume a company in its first year of business files its tax return on 1 February and has $20,000 of tax to pay for the current year, due 7 April.
As a result of filing the income tax return, the company must pay provisional tax of $21,000, due 7 May. There will also be another provisional tax bill in August. This will result in having $41,000 of tax to pay within three months. Without appropriate planning, the bill can seem huge. To alleviate this, the company should put money in a separate bank account, make voluntary payments through the year, or use tax pooling.
Failure to pay provisional tax on the due date can have adverse implications, and result in penalties and interest. Ignoring provisional tax payments only increases the problem.
Remember… if you are unable to make your payments or feel they are too much, our advisors may be able to help.
DISCLAIMER No liability is assumed by Baker Tilly Staples Rodway for any losses suffered by any person relying directly or indirectly upon any article within this website. It is recommended that you consult your advisor before acting on this information.
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