Understanding Terminal Tax and Provisional Tax in New Zealand

What Is Terminal Tax?

Terminal tax is the final tax payment for a financial year. It’s the amount you still owe after subtracting any tax you’ve already paid, like provisional tax or PAYE. Here are some key points to remember:

• It’s based on your actual income for the year.

• If you didn’t pay enough tax during the year, you’ll need to pay the balance as terminal tax.

• If you paid too much, you’ll get a refund.

  
  

Due Date: The terminal tax is usually due on 7 April following the end of the tax year (or 7 February if you don’t use a tax agent).

What Is Provisional Tax?

Provisional tax is tax you pay in advance for the current year, based on your previous year’s tax amount. Here’s how it works:

• You pay it in instalments throughout the year, typically in three payments.

• It helps spread the cost of your tax bill, so you’re not hit with a big lump sum later.

• You only need to pay provisional tax if your tax owed from the previous year is over $5,000.

  
  

Typical Payment Dates:

• 28 August

• 15 January

• 7 May

  
  

How Is Provisional Tax Calculated?

Most people use the standard method to calculate provisional tax:

1. Take your last year’s tax amount owed.

2. Add 5% to it.

3. Divide that total into three equal payments.

   
   

Example:

• Last year’s tax owed: $10,000

• Add 5% = $10,500

• Pay $3,500 on each due date

  
  

If your income changes during the year, you can switch to the estimation method and update your expected tax accordingly.

Why Do People Get Caught Out?

Many new business owners face the “second year tax shock.” In your first year, you don’t pay tax until the end. But in your second year, you might have to pay:

• Terminal tax for year one

• Provisional tax for year two

  
  

That’s two years of tax in one go—so it pays to plan ahead.

Tips for Managing Your Tax Payments

Managing your tax payments can feel overwhelming, but it doesn’t have to be. Here are some practical tips to help you stay on top of your obligations:

Keep Accurate Records

Maintaining accurate financial records throughout the year can make tax time much easier. Use accounting software or hire a professional to ensure everything is in order.

Set Aside Money for Tax

Consider setting aside a portion of your income each month specifically for tax payments. This way, when the time comes, you won’t be caught off guard by a large bill.

Consult a Tax Professional

If you’re unsure about your tax obligations, reach out to a tax professional. They can provide tailored advice and help you navigate the complexities of the tax system.

Final Thoughts from Count Me In Limited

At Count Me In Limited, we know tax can feel like a headache—but it doesn’t have to. We’re here to help you understand what you owe, when you owe it, and how to plan ahead so there are no nasty surprises.

Need help working out your tax payments or choosing the best method? Let’s chat! Reach out to us today, and we’ll guide you through it with calm, clear advice tailored just for you.