Aligning provisional tax payments with GST
2006 changes combine provisional tax payments with GST enabling taxpayers who have a GST refund to offset the refund amount against their provisional tax liability.
Sections EF 3(3), HB 1(5)b), HG 12(2)(c), IZ 7(b), parts MB, MC 1(1), MD 2, MD 2B(3), ME 5(1)(d), ME 5(2)(d), ME 11(1)(b), ME 11(2)(b), ME 12(1)(c), ME 13(6)(e), MK 4(1)(b), MK 5, MZ 8, MZ 9, NC 20(1), NG 17(2), OB 1, OB 6(3)(k), and Schedule 13 (parts A and B) of the Income Tax Act 2004; sections 3, 39, 39B, 119(1), 120C(1), 120K, 120L(1), 120B(b), 120Q, 139C(1), 140D(2)(d) and (3)(d), 140DB(2)(b), 141E, 173(p)(2), 173Q and 173R of the Tax Administration Act 1994; sections 2, 15, 15AB, 15B, 15C, 15D, 15E, 16, 16B, 17, 53(1)(c), 55(7)(b), 56(6) and 78A of the Goods and Services Tax Act 1985 and section 28(3) of the Student Loan Scheme Act 1992
The provisional tax rules have been amended to make paying provisional tax easier for small businesses. The changes will combine the payment of provisional tax with GST, thereby reducing the number of interactions taxpayers have with Inland Revenue. The changes will mean both tax payments can be made on the one form and will enable taxpayers who have a GST refund to offset the refund amount against their provisional tax liability.
Currently GST is due on the last working day of the month, which can cause confusion for taxpayers. To ensure consistency of due dates across all months, the GST due date will change to the 28th of the month.
Also, taxpayers who qualify to use the GST ratio method for calculating provisional tax instalments will be able to match their provisional tax payments with their cashflow.
The GST due date change will apply to taxable periods ending on or after 31 March 2007. Aligning provisional tax payment dates to GST due dates and the GST ratio method to base provisional tax payments on a percentage of GST taxable supplies will apply from the 2008-09 income year.
Complying with the tax system can be particularly burdensome for small businesses. To identify what small and medium-sized businesses saw as the most problematic compliance issues for them, Inland Revenue undertook extensive consultations with small and medium-sized enterprises (SMEs) in 2002.
The research found that 70% of those surveyed considered tax to be the largest contributor to business compliance costs. In dealing with the tax system the top four tax compliance issues facing SMEs were:
- the time spent filling in forms;
- provisional tax not being aligned with cashflow;
- good compliance history not being considered; and
- penalties and interest.
To address these concerns a government discussion document, Making tax easier for small businesses, was released on 17 September 2003. The proposals contained in the discussion document included aligning the provisional tax and GST payment dates and providing another means to calculate provisional tax by basing provisional tax payments on a percentage of a business's GST turnover.
Aligning payment dates reduces the amount of time required to complete forms and the number of payment dates a taxpayer has to remember.
Aligning payment dates also made it easier to introduce the GST “ratio” method which bases provisional tax payments on a percentage of GST taxable supplies so taxpayers are required to undertake the provisional tax calculations just once from figures in their GST return. The GST ratio method enables provisional tax payments to be aligned with a business's cashflow and reduces their exposure to use-of-money interest.
Part MB of the Income Tax Act 2004, sections 120C and 120K of the Tax Administration Act 1994, and sections 15 and 16 of the Goods and Services Tax Act 1985 have been rewritten to incorporate the new changes. This Tax Information Bulletin item focuses on the major changes to the new rules. The key features of the new provisional tax and GST rules are as follows.
Changes to the GST due date
Under section 6 of the Goods and Services Tax Act, the GST due date will change from the last working day to the 28th of the month, except when the due date is 28 December. In this case, the due date moves to 15 January. This change will apply to taxable periods ending on or after 31 March 2007.
Aligning provisional tax payments with GST payments
Under sections MB 8 and MB 11 to 14, Schedule 13 and section 139C of the Tax Administration Act, provisional tax payments will be aligned with GST payment dates. Provisional taxpayers who are registered for GST on a two-monthly basis will pay provisional tax on their 2nd, 4th and 6th GST returns for the year. Taxpayers who pay GST monthly will pay provisional tax on their 4th, 8th and 12th GST return for the year. For example, a March balance date taxpayer will pay provisional tax on 28 August, 15 January and 28 April. Taxpayers who account for GST on a six-monthly basis will only have to pay their provisional tax twice a year with their GST.
Provisional taxpayers who are not registered for GST will pay provisional tax on the 28th day of the 5th, 9th and 13th months after balance date. That is 28 August, 15 January, and 28 April for a March balance date taxpayer.
Schedule 13 of the Income Tax Act 2004 has been replaced to reflect the new payment dates. The Schedule also provides the provisional tax due dates for taxpayers with balance dates other than March.
Voluntary payments of provisional tax can be made at any time. Taxpayers on monthly or two-monthly GST taxable periods can make voluntary payments on their GST form in the months when they are not required to make compulsory provisional tax payments.
Also as a result of combining the two taxes on the one GST form, taxpayers with a GST refund will be able to offset the refund against their provisional tax liability. When a taxpayer offsets their GST refund against their provisional tax liability and their GST refund is subsequently reassessed resulting in the refund being reduced, the taxpayer will be given at least 30 days after the notice of reassessment is issued to pay the tax shortfall before the late payment penalty is imposed.
|Example 1: Six-monthly GST payments|
John is a builder whose taxable supplies are under $250,000 and therefore he pays GST on a six-month basis. John pays GST on the last working day of October and April each year. John's tax year is 1 April to 31 March. He currently pays provisional tax three times a year on the 7th of July, November and March. Every year John has to make five different tax payments - two GST and three provisional tax, and although the dates of provisional tax payments stay the same (7th of the month), the dates for GST tax payments can vary.
Under the new rules
Under the new rules, John will still pay GST twice a year - in October and April. However, the due date for making GST payments will become the 28th of the month of payment.
John will have fewer provisional tax payments to make - from three down to two, paid together with his GST on 28 October and 28 April.
This change will reduce the time that John has to spend making tax payments and will ease his compliance burden. It will also create certainty about the dates when tax is due. Finally, he will be able to keep his money for longer or may make any additional voluntary payments at any time. He will receive use-of-money interest for any voluntary payments made.
|Example 2: Two-monthly and monthly GST payments|
Mark is a panel beater who pays GST two-monthly. Mark's GST taxable periods end on the last day of January, March, May, July, September and November. His income tax balance date is 31 March and he pays provisional tax three times a year on 7th of July, November and March.
Mark currently makes nine annual tax payments - six GST payments and three provisional tax payments. The new rules will change this.
Under the new rules
Under the new rules all two-monthly GST taxpayers will make three compulsory provisional tax payments on the 28th day of the 5th, 9th and 13th months after their balance date. Also, the GST payment date will change from the last working day of the month to the 28th day of the month.
Mark will have six annual tax payments to make:
Aligning GST taxable periods: Section 15B of the Goods and Services Tax Act
The vast majority of GST-registered taxpayers have their GST taxable periods aligned to their balance date. However, a small percentage of GST-registered persons whose GST taxable periods are not aligned to their balance date will be required to align their GST taxable periods. Inland Revenue will contact those taxpayers affected. This will occur during the 2007-08 income year.
Changing taxable periods: Sections MB 8, MB 26-27, and sections 15C and 15D of the Goods and Services Tax Act
As provisional tax payments are linked to GST taxable periods, when a taxpayer changes GST taxable periods, or is required to change taxable periods, their provisional tax payments would also change. When a taxpayer changes GST taxable periods they continue on the old cycle until the end of the old taxable period cycle matches up with the beginning of the new cycle. For example, a March balance date taxpayer who accounts for GST on a two-monthly basis (ending January, March, May, July, September, and November) applies during May to change to a six-monthly basis. Although they applied in May they continue to pay GST on a two-monthly basis until the end of September. They would then change to a six monthly basis from 1 October onwards. For that income year they would make two provisional tax payments on 28 August (on their two-monthly return) and again on 28 April (on their six-monthly return). The legislation also includes examples of changes in taxable periods - see sections MB 26 and MB 27. 1
When a taxpayer changes their taxable periods and an instalment date under the old payment cycle was an interest instalment date on which use-of-money interest applied, then it remains an interest instalment date regardless of the fact that it was paid after the new GST taxable period begins. For example, Bridget changes from a six-monthly GST taxable period to two-monthly taxable periods with effect from 1 October. She is required to make a provisional tax payment on 28 October. As this payment due was an interest instalment payment on which use-of-money interest applied under the old payment cycle, it remains an interest instalment payment.
Registering for GST or cancelling GST registration:
Section MB 25
When a provisional taxpayer registers for GST on a monthly or two-monthly basis part way through the year, their provisional tax payments do not change as they are due on the same due dates for payment of GST with regard to:
- the 2nd, 4th and 6th GST returns for a two-monthly GST payer; or
- the 4th, 8th and 12th GST returns for a monthly GST payer.
However, taxpayers who register for GST and elect to account for GST on a six-monthly basis will pay provisional tax on the old basis until the beginning of their six-monthly period. For example, Mary begins GST on 1 July and elects to be on a six-monthly basis. Her balance date is 31 March and she will pay provisional tax on the old payments basis until the end of September when she will begin paying provisional tax on a sixmonthly basis. Provisional tax payments will therefore be due on 28 August (old basis) and 28 April (new basis).
When a taxpayer who accounts for GST on a six-monthly basis deregisters, following deregistration they will pay provisional tax three times a year on the standard provisional tax dates (28 August, 15 January and 28 April). The next payment will be due on whichever of the three standard provisional tax payment dates occurs 30 days after the taxpayer deregisters. For example, Denis has a March balance date and pays GST on a six-monthly basis. On 11 October Denis deregisters for GST. He makes the 28 October payment on the old basis and then his next provisional tax payments are due on 15 January and 28 April.
GST ratio method
Calculate provisional tax using the GST ratio method: Sections MB 7, MB15-MB 18
Another option has been introduced for the calculation of provisional tax - basing provisional tax payments on a percentage of GST taxable supplies. At present, taxpayers can choose whether to base their provisional tax either on the standard method of 105% of last year's residual tax or to estimate their provisional tax. Starting from the 2008-09 income year some provisional taxpayers will be able to base their provisional tax payments on a percentage of their GST taxable supplies. This provides taxpayers with another method of calculating their provisional tax which may be better suited to their particular circumstances.
This option addresses concerns taxpayers had with provisional tax payments not being aligned with cashflow and also reduces the taxpayer's exposure to use-of-money interest.
Businesses whose income is declining or taxpayers whose income fluctuates during the year may benefit from this method. However, this method of calculating provisional tax liability will not benefit everyone. Taxpayers should seek financial advice or satisfy themselves as to the benefits before deciding on whether to adopt the ratio method.
Section MB 15 outlines the qualification criteria that a taxpayer must fulfil in order to use this calculation method. Taxpayers will qualify if:
- the taxpayer's residual income tax liability for the previous year exceeds $2,500 and does not exceed $150,000; and
- the taxpayer was registered for GST for the whole of the previous tax year and the previous year was not a year in which they began a taxable activity; and
- their ratio for the current year is between 0 - 100%, and
- for the current tax year the taxpayer files GST returns on a monthly or two-monthly basis.
To use the GST ratio method taxpayers must fulfil the above criteria and forward an election to the Commissioner before the beginning of the income year. The Commissioner will calculate the ratio and advise the taxpayer of their rate before their first provisional tax payment due date.
When a taxpayer chooses to use the GST ratio method they are required to make six provisional tax payments (every two months) along with GST. Monthly GST payers would pay provisional tax on every second GST return.
Under section MB 15, a taxpayer must discontinue the use of the GST ratio method if:
- the taxpayer's GST registration ends in the current tax year; or
- as a result of a reassessment they no longer qualify; or
- the taxpayer changes their taxable period to a sixmonthly taxable period; or
- the taxpayer has failed to file a GST return by the due date and the return is still not filed within 60 days of the due date.
A taxpayer can also elect to discontinue the use of the GST ratio method at any time.
If a taxpayer discontinues the use of the GST ratio method before the first provisional tax instalment date, they can elect to use the standard or estimation method of calculating provisional tax. However, if a person discontinues the use of the GST ratio method after the first provisional tax instalment date, the taxpayer is required to estimate their provisional tax payments for the remainder of the income year.
Calculation of ratio: Section MB 7
Once the taxpayer elects to use the GST ratio, Inland Revenue will calculate the ratio and advise the taxpayer. The ratio is based on the taxpayer's residual income tax liability for the previous year divided by their taxable supplies figures for that year, expressed as a percentage and rounded to the whole percentage figure.
|Residual income tax for previous tax year||× 100|
|Total GST taxable supplies for |
corresponding income year
|(the resulting percentage is rounded to the whole percentage number)|
When information on residual income tax or GST taxable supplies is not available for the previous income year, the taxpayer would use the information for the year and corresponding income year before the previous income year.
However, if the previous year or year before the previous year is a transitional year the taxpayer should ignore the transitional year and use the residual income tax and GST taxable supplies figures for the year before the transitional year.
Calculation of provisional tax liability: Sections MB 10 and MB 18
To calculate provisional tax payments the taxpayer multiplies the ratio by their total taxable supplies for the two-month period (monthly payers will add the taxable supplies for two return periods).
When a taxpayer sells an asset they can elect to take account of the sale in calculating both the current year's provisional tax liability and the calculation of the GST ratio in the following year. To make the adjustment the asset has to exceed the greater of 5% of the taxpayer's taxable supplies for the previous 12 months or $1,000.
|Example 3: Calculating provisional tax using the GST ratio method|
Angela sells second-hand computers over the internet and meets all the criteria to qualify for the new rule. Angela is a two-monthly GST payer and decided that she wants to base her provisional tax on her GST taxable supplies starting in the 2008-2009 income year.
The Commissioner advises Angela that her ratio is 8%. This is calculated from her residual income tax and taxable supplies figures for the 2006-07 income year. Her residual income tax and taxable supplies for that year were $20,000 and $250,000 respectively. By dividing the residual income tax figure by taxable supplies and expressing the result as a percentage, we get the ratio of 8% (20,000/250,000 × 100 = 8%).
Angela must apply the ratio to each of her GST period's taxable supplies to determine the amount of provisional tax payable. Angela's taxable supplies for her first GST period amount to $13,000 and her provisional tax liability for that period will be $1,040 (13,000 × 8% = $1,040). The same formula must be used to calculate her provisional tax liability for the other five GST periods.
Use-of-money interest: Section MB 28, section 120C and 120K of the Tax Administration Act
Section 120K of the Tax Administration Act has been replaced with sections 120KB to KE which set the due dates for provisional tax instalments for the purposes of calculating use-of-money interest.
Taxpayers who apply the ratio method correctly and pay the provisional tax calculated using the GST ratio method will be safe-harboured from use-of-money interest if their provisional tax payments fall short of the end-of-year liability. On the other hand, they will not receive useof- money interest if they pay too much provisional tax during the year as a result of using the GST ratio method.
If the taxpayer elects out of the GST ratio method after the first instalment, they will be required to estimate their provisional tax liability for the rest of the year and will be liable to use-of-money interest.
When a taxpayer is liable to use-of-money interest on provisional tax payments, then the three compulsory provisional tax payments (two payment dates for sixmonthly GST filers) will be subject to use-of-money interest. If a taxpayer subject to use-of-money interest changes their balance date, they will be subject to useof- money interest on each of the compulsory instalments for the transitional year. The number of instalments in the transitional year may be more or less than three instalments. Schedule 13, Part B sets out the number of compulsory instalments for transitional years of differing periods.
The use-of-money interest provisions have been amended to ensure that where a taxpayer makes a voluntary payment of provisional tax they will receive interest from the day after the date of payment. The amendment ensures that interest is paid even where the payment is made before the first provisional tax instalment date.
Changing income tax balance date: Sections MB 19-24 and sections 15B-15D of the Goods and Services Tax Act
When a taxpayer changes their balance date, until the new balance date is reached the taxpayer must continue to pay provisional tax on the instalment dates that applied before the change of balance date. Once the new balance date is reached the taxpayer pays provisional tax on the instalment dates relating to the new balance date.
Instalments of provisional tax in this transitional year are due on the 28th of the months specified in Schedule 13, Part B and the final instalment is due on the 28th of the month following the final month in the transitional year or 15 January where November is the final month.
The provisions relating to the calculation of provisional tax liability using the standard and estimation options are similar. However, the legislation introduces rules for the calculation of provisional tax in the transitional year for those taxpayers who use the GST ratio method. When a taxpayer changes their balance date and moves from a set of instalment dates in even-numbered months to a set of instalments in odd-numbered months or vice versa, there will be a one-month period when GST and provisional tax are due before they change to their new balance date. The taxpayer will determine the amount of provisional tax due for this period by applying the ratio to the one-month's GST taxable supplies.
When a taxpayer (other than a GST ratio method taxpayer) changes their balance date and their GST taxable periods do not align with their new balance date, the taxpayer must change their GST taxable periods to align with the new balance date. This is achieved by truncating the last taxable period before the new balance date so that the taxable periods and income year end on the same date.
The legislation has been amended to provide taxpayers with the option of advising Inland Revenue by phone when requesting a change in a GST taxable period, seeking a refund of the amount of provisional tax paid, or providing an estimate of their provisional tax liability.
Also, the threshold above which taxpayers are liable to pay provisional tax has been clarified. The previous legislation was unclear about whether a person whose residual income tax was exactly $2,500 was liable for provisional tax. The legislative changes make it clear that a provisional taxpayer is one whose residual income tax liability is more than $2,500.
Consolidated groups using the GST ratio method: Sections MB 29-32
When a consolidated group using the GST ratio method to calculate provisional tax is joined by a new member at the start of the income year, the group can continue to use the GST ratio method if the group meets the GST ratio method qualifying criteria - including the residual income tax threshold (residual income tax greater than $2,500 and less than or equal to $150,000). Inland Revenue will need to recalculate the ratio percentage based on including the residual income tax and GST taxable supplies figures for the new member.
If, part way through a year, a new member joins a consolidated group using the GST ratio method, then even though the group may now exceed the maximum residual income tax threshold of $150,000, the group can continue to use the ratio method until the end of the year. Inland Revenue would need to recalculate the ratio percentage based on including the residual income tax and GST taxable supplies figures of the new member. The new ratio would apply to provisional tax payments that are due after the date that the new member joined.
When a consolidated group that is not using the GST ratio method is joined after the start of the income year by a new member that is using the GST ratio method, the consolidated group cannot start using the ratio method part-way through the year.
GST Act changes
Amendments have also been made to the Goods and Services Tax Act. Section 15AB is a transitional provision inserted to require registered persons to align their GST taxable periods to their income tax balance date. The section applies to the 2007-08 year.
With effect from the 2008-09 income year, sections 15 and 15AB will be replaced with sections 15 to 15E which deal with taxable periods and changes to taxable periods, as a result of paying provisional tax payments along with GST payments.
Section 16 will be replaced with a new section which changes the due dates for GST returns to the 28th of the month except 28 December when payment becomes due on 15 January. When a registered person ceases being registered, the due date of their final return will be changed to the 28th of the month following the end for their final taxable period (or 15 January if the month following their final taxable period is December). The changes to section 16 apply to taxable periods ending on or after 31 March 2007.
Student Loan Scheme Act changes
As a result of the introduction of different provisional tax payment dates, the Student Loan Scheme Act 1992 (section 28(3)) has been amended to clarify that student loan repayments will be due on three fixed payment dates, being the 5th, 9th and 13th months after balance date. For taxpayers with a March balance date these dates will be 28 August, 15 January and 28 April. This is irrespective of whether the taxpayer pays provisional tax on those dates. This change applies to the 2008-09 and subsequent tax years.
These new rules will apply from the following dates:
- The change to the GST due date will apply to taxable periods ending on or after 31 March 2007.
- Aligning provisional tax payment dates to GST payment dates will apply from the 2008-09 income year.
- The ratio method of basing provisional tax payments on a percentage of GST taxable supplies will apply from the 2008-09 income year.
Further examples are contained in the legislation to illustrate the application of the changes, together with a table of the legislative linkages (see section MB 8).
Tax agent workloads
As a result of tax agent clients having their GST taxable periods aligned to their income tax balance dates, some tax agents may experience their workloads being unduly concentrated around certain dates.
When a tax agent meets the following criteria, Inland Revenue will consider (with their client's permission) altering the client's balance date by a month to smooth the tax agent's workflow.
The criteria to be met are:
- the number of clients forced to align their taxable periods relative to the agent's total number of clients must be significant; and
- the tax agent can demonstrate that the forced alignment has resulted in their filing profile being significantly concentrated around certain dates - for example, moving from a 60/40 split to an 80/20 split; and
- that the imbalance would cause the tax agent significant difficulties in meeting their obligations.
Inland Revenue would consider relaxing the balance date by a month for clients who have had their GST periods aligned to their balance date. The client would need to agree to such an arrangement before the balance date would be changed.
In these cases the tax agent would need to apply to Inland Revenue for a relaxation of their client's balance date during the 2007-08 income year, being the year that the alignment takes effect. This would only be a temporary measure as once the alignment has occurred there would be no need to relax the balance dates further.
1Note that there is an error in the examples at the end of section MB 27 of the Act. The references to 20 January in the examples should refer to 15 January. This error will be corrected in the next amendment Act.