Provisional Tax For Startups
What is Provisional Tax?
Provisional Tax is not a separate tax. When you first start a business, you don't have to pay any income tax to IRD for quite some time.
Your first financial year ends on 31st March 2017 - then your financial accounts and returns are prepared and any income tax payable for that year is due to Inland Revenue only by 7th April 2018. This gives you up to 24 months trading time before you have to pay your first years' tax to IRD. This tax is called Terminal Tax.
Now, in your second year of trading - say from 1st April 2018 to 31st March 2019, your first terminal tax is over $2,500 - then your provisional tax is triggered. IRD takes your terminal tax figure and just add 5% to it. Payment for Provisional Tax is usually done in 3 instalments during the second year, but you'd have to pay it in the second year itself - not a year later.
When your financial accounts and tax returns are prepared for 31st March 2018 - all that provisional tax you've paid will be sitting as a credit against your name to offset your final tax bill for the year. Any over-payment will be refunded to you, any underpayment will become your terminal tax and will be payable on 7th April 2019.
Installment sample of a 31st March balance date:
|First Instalment||28th August|
|Second Instalment||15th January|
|Third Instalment||7th May|
How To Estimate Your PT?
When working out the tax, keep the following points in mind:
⇒ Add up all your estimated income.
⇒ Work out the tax on the total.
⇒ Subtract any tax credits (like PAYE).
Using the estimation option, if your estimated residual income tax is lower than your actual residual income tax for that year, you may be liable for interest on the underpaid amount.
You can estimate your provisional tax as many times as necessary up until your last installment date. Each estimate must be fair and reasonable.