Provisional Tax is not a separate tax but a way of paying your income tax as the income is received through the year. You pay instalments of income tax during the year, based on what you expect your tax bill to be. The amount of provisional tax you pay is then deducted from your tax bill at the end of the year.
Imagine a situation where a client (31 March balance date) who is in safe harbour, pays P3 one day late. When the financial accounts are prepared for the year it is discovered there is terminal tax but the RIT is still below $60,000.
Instead of terminal tax being due on the following 7th April, it becomes payable back dated to P3. Interest accrues on it from that date.
For example, a client owed $8000 at 7 May 2019. He paid his tax on 8 May 2019. When he comes to pay terminal tax of $20,000 he discovers Inland Revenue has added UOMI from 8 May 2019 right through to 7 April 2020.
This means for one day’s use of $8000 he gets a bill for interest of say $1250. This is an effective interest rate of thousands percent.
The Department flatly refuses to do anything about this.
Your solution is to buy tax from a tax pooling company. This will at least substantially reduce the interest.
Similar complications will arise if P1 or P2 are paid lately.
You can also get the anomaly where Inland Revenue considers the client has paid $1 short. If it is P1 for example the interest charged gets deducted from the payment of P2 so that is also short paid and leads to the horrible consequences above. In this case, the answer is to buy $1 from a tax pooling company.
Disclaimer: The information provided on this article is for general informational purposes only and should not be relied upon as tax advice. The content on this website is not intended to be a substitute for professional tax advice, diagnosis, or treatment. Always seek the advice of qualified legal professionals with any questions you may have regarding your personal situation. Reliance on any information provided by this article is solely at your own risk.
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