Can't cover provisional or terminal tax? Your funding options

Provisional tax is meant to spread your income tax across the year. In practice, it’s one of the most common reasons good businesses end up owing IRD. The amounts are based on last year’s numbers, the dates don’t care what your bank balance looks like, and the second year of trading has a sting most new owners don’t see coming.

Why do provisional and terminal tax bills catch people out?

There are three usual reasons.

The second-year double-up. Provisional tax “often applies to businesses in their second year of trading” (business.govt.nz). In year one, you usually pay no provisional tax. Then in year two, the terminal tax for year one falls due and the provisional instalments for year two begin. If year one went well, both bills are sizeable, and they can land within months of each other.

Growth. Under the standard method, provisional tax is worked out from last year’s tax plus 5% (or the year before plus 10%). If your profit jumps, the instalments may be too low and a large terminal tax bill follows. If profit falls, the instalments may be more than you can comfortably pay.

Cash spent on growth. Profit isn’t cash. A business that’s growing fast often has money tied up in stock, equipment, wages and customers who haven’t paid yet, so the tax on last year’s profit arrives just as the account is stretched.

What are the key dates?

For a 31 March balance date using the standard or estimation method, provisional tax is usually paid in three instalments: 28 August, 15 January and 7 May. Terminal tax for the year is due on 7 February of the following year, or 7 April if you have a tax agent with an extension of time (business.govt.nz). If a date falls on a weekend or public holiday, it moves to the next working day.

Our NZ tax due-date timeline lays out the next 12 months for your situation, alongside GST and PAYE.

What are your options if you can’t pay on time?

Option	How it works	Worth considering when
Instalment arrangement	Agree regular payments with IRD in myIR	The shortfall is moderate and cash flow can clear it within a reasonable term
Tax pooling	Buy date-stamped tax from a registered intermediary	Your accountant confirms it fits your tax type and timing
Business loan	Borrow and pay IRD on or close to the due date	The amount is large, there’s a planned repayment, and the cost compares well
Talk to your accountant	Review the method, estimates and any reassessments	Profit has changed sharply from last year

These aren’t mutually exclusive. Some businesses use a loan for one bill and an arrangement for another, or a loan to pay a pooling intermediary. The arrangement vs loan cost check helps compare the dollars.

Bill due soon and not enough in the account? See whether funding fits. There’s no credit check to ask, and you’ll speak to a real person.

How does use-of-money interest work on provisional tax?

IRD charges use-of-money interest daily on underpaid tax. It doesn’t compound and it’s deductible for business purposes (IRD UOMI). We never quote the current rate, because it changes. Check IRD’s page for that.

On provisional tax, the timing matters. IRD says that under the standard method, if your residual income tax is under $60,000, interest is generally charged from the day after the end-of-year due date; above that, interest runs from the day after the final instalment date (IRD). Under the estimation method, interest applies to differences from each instalment date. That’s one reason estimates should be realistic. Our UOMI explainer goes further.

When does a loan make sense for provisional tax?

A loan is worth looking at when:

• the bill is large relative to your monthly cash flow;
• you have property equity, or steady turnover that supports a cash-flow loan;
• late payment would trigger penalties and put you on IRD’s radar for the first time; and
• you can see how the loan will be repaid, such as from incoming contract payments or a refinance.

It’s less likely to be right when the shortfall is small and an arrangement would clear it in a few months, or when the underlying business is losing money.

An illustrative example

Illustrative only. Not a real client and not an offer.

A two-year-old Wellington software consultancy had a strong first year. In February, its terminal tax for year one falls due, and it’s still catching up on the January provisional instalment for year two. Combined, that’s about $96,000, against a bank balance of $40,000 and two large invoices due in late April. A short cash-flow facility covers the gap so both are paid on time, and it’s cleared from the April receipts. The directors also switch to paying a set amount into a tax account every month.

How can you stop it happening again?

• Set aside tax as you earn, in a separate account, every time you invoice or get paid.
• Ask your accountant about AIM or the ratio method if your income is uneven.
• Review estimates mid-year if profit has moved a lot.
• Put every date in the calendar, including GST and PAYE, using our due-date timeline.

Talk to us before the due date

If a provisional or terminal tax payment is coming up and the money isn’t there, start a 60-second enquiry. Enquiring won’t show up on your credit file, your details aren’t handed to a long list of lenders, and someone who understands IRD’s dates will call you. Please be precise about the amount, the due date and any property you own, so we can tell you quickly whether funding, pooling or an arrangement is the better fit.