Understanding Provisional Tax and Tax Relief Measures for Businesses

If your last income tax return resulted in a tax payment exceeding $5,000, you may be required to pay provisional tax for the following year. Provisional tax acts as progress payments on your upcoming income tax obligations.

The amount you need to pay is based on your expected profit for the year. Typically, it is calculated based on the tax liability from the previous year, known as residual income tax (RIT).

Even if provisional tax is not mandatory for you, you can choose to pay it to spread out your tax responsibilities throughout the year. This approach helps manage cash flow and alleviates the pressure of a lump-sum payment at year-end.

For new businesses, the initial provisional tax payment can be challenging. It involves paying both the previous year’s income tax and the first installment of next year’s provisional tax simultaneously. Fortunately, there are ways we can assist in easing this burden.

If you are self-employed or a partner in a partnership, you may qualify for a 6.7% discount on your first year’s income tax. This incentive encourages early tax payment and provides financial relief before provisional tax becomes due for the first time.

COVID-19 and Provisional Tax

Specific considerations apply to tax relief measures aimed at assisting businesses affected by COVID-19:

– The residual income tax (RIT) threshold for provisional tax is now $5,000, effective from the 2020-21 tax year.
– If your business continues to experience COVID-19-related challenges and your income falls short of the initial estimate, you may be eligible for early refunds by re-estimating your provisional tax.
– In cases where you are unable to meet tax payment deadlines, the Inland Revenue has the authority to waive penalties and interest. You may also qualify for a use of money interest (UOMI) write-off.

It is crucial to keep your tax plan up to date. If circumstances change within your business, adjustments to your plan may be necessary. Please keep us informed about your business’s situation so that we can provide appropriate guidance.

Stay proactive in managing your tax obligations. Contact us today to discuss your business’s specific needs and ensure compliance with tax regulations.


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