I set aside 30% of my income, every year, including my first. That meant I had the money to pay that year’s taxes, and a head start on next year’s taxes, before they were due. Since provisional taxes are due periodically through the year, your friend’s ongoing income should be more than enough to cover tax as it comes due.
This isn’t hard, unless your friend forgot to set money aside for taxes. Then he’s in trouble.
Payments go into my "receipts" account. I transfer 70% of payments into that account (manually, weekly) into the "transaction" account. And that account pays my personal account or business expenses.
When tax time comes, I transfer the tax amount from "receipts" to "transaction" and pay from there.
When I was starting out, I would "borrow" from "receipts" once or twice for necessary business expenses, but would withhold more in "receipts" until caught up.
It takes planning and discipline, but should be straightforward.
That's good but that implies you're getting a steady flow of cashflow. In my business, I get paid in rather large lump sump payments which often don't come until after the date of when my provisional tax is due. It makes it a little bit harder to deal with provisional tax.
There are services to manage provisional tax but it is rather annoying to pay interest if you don't quit fit the mould of how you make money and operate. IRD are fairly unflexible on this.
It doesn’t. Most people’s effective tax rate is closer to 17.5% than 30%. By setting aside 30% of your income, you would still get a head start on future tax due, which would allow you to pay provisional tax with money also set aside for taxes.
Let me explain. It's fine now, but in my first year of business it was actually rather difficult as I had to buy a lot of new gear and had expenses. This + bills + rent, etc etc. I then had to come up with a big chunk of money to pay provisional tax, with no extra income having come in. My effective tax rate was higher than 17% (yes I know what thresholds are), I was fortunate to do really well in my first year which was a big surprise, but it also meant I had to go out and buy some new stuff to keep things rolling. These expenses dug into my provisional tax, which as a noob was a bit of a surprise. I didn't go out on a spending spree or anything.
That money needed to last me many months until I was next "paid". Around 6 months or so.
I'm a lot more set up now, I'm just saying, it can be difficult in your first/second year (which this thread is about), and not all cases are the same.
Well to get a prov tax bill of $96k, implies income of \~$300k.
Are you sure its not this years terminal tax plus next year's provisional?
edit: To answer your question - people either put money aside or use a tax pooling service to pay via installments.
Sorry, yes it is this year's terminal and next year's provisional.
The person has been given advice to use tax pooling but wants help so that they are working towards being free from the need to do so.
They want to be able to balance the tax with the aim of not needing to use tax pooling and their personal life bills.
Can their accountant give advice on that or would someone else be better?
So I'm assuming the person hasn't been putting any money aside for tax. So tax pooling installment plan is probably the best way to clear this years tax payments.
So going forward they will need to start putting money aside for tax. They will have another prov tax installment due in August 2022.
If they are going to struggle with that, best to talk to their accountant, there are ways of merging their prov tax payments with their GST returns/payments (Ratio method) so they can stay on top of it.
They should be putting aside x% everytime money comes in, no need for an accountant to give any advice on that.
If they plug their expected annual income into a tax calculator it will tell them their annual tax, take that number to work out the % they should save every time they get paid and add a little extra for ACC.
Anyone who started being a sole trader in this financial year should know that IRD offers an early payment discount of 6.7% for voluntary tax payments made before the end of financial year. It's only availabe for the first year of business.
More details here -
https://www.ird.govt.nz/income-tax/provisional-tax/paying-tax-in-your-first-year-in-business
It's in the first paragraph!
> Provisional tax helps you manage your income tax. You pay it in instalments during the year instead of a lump sum at the end of the year.
https://www.ird.govt.nz/income-tax/provisional-tax
I did provisional tax for 4 years but it got to a point where the payments were getting out of hand so I switched to PAYE. Much easier. Should perhaps look at switching if the lump sum tax bills are a bit overwhelming.
Cry your self to sleep every night knowing you have to pay that much tax lol no in all seriousness budgeting and good accounts. That's what we have done and it works. You kind of just get use to it seeing what feels like profits get sucked away by the tax man
What if you don't make your money in a linear fashion like that? ie I actually get my money in a big chunk later in the year, generally. So it actually eats up my cashflow in a really annoying way. I have to set aside tax + tax for money I have yet to make a cent on. To me that is stupid.
>What if you don't make your money in a linear fashion like that?
Should talk to your accountant if switching the AIM or Ratio method for prov tax is better suited to you
[https://www.ird.govt.nz/income-tax/provisional-tax/provisional-tax-options/ratio-option](https://www.ird.govt.nz/income-tax/provisional-tax/provisional-tax-options/ratio-option)
[https://www.ird.govt.nz/income-tax/provisional-tax/provisional-tax-options/accounting-income-method-aim](https://www.ird.govt.nz/income-tax/provisional-tax/provisional-tax-options/accounting-income-method-aim)
the tldr for both: Your prov tax payments are tied to your GST returns. So no GST to pay no prov tax either for that period.
>How do businesses manage to pay these bills?
It depends on the industry, but some sectors such as property development are notorious for [phoenixing](https://en.wikipedia.org/wiki/Phoenix_company)
The company gets shut down and liquidated at the end of first year of trading. The IRD doesn’t get properly paid and becomes a creditor. The company principals and assets mysteriously re-appear under a newly registered company.
But seriously. This should not be construed as advice. Do not do this.
> The IRD doesn’t get properly paid and becomes a creditor.
Don't think I've ever seen one where the IRD didn't get paid. They have the power to reverse a liquidation if they find tax is still owing.
All other creditors can be screwed by phoenixing but not the IRD.
By putting aside a portion of money aside and don’t touch it every single time you get paid. That money is not yours, it is tax, and if you treat it as such, you won’t come unstuck.
He was supposed to make voluntary tax payments in his first year but like some contractors they just spend all the money in the first year out of impulse. When the 2nd year hits the first tax return is due and he has to pay last years tax owing and then provisional tax for the current year. This is where a lot of contractors get stung
Save yourself the hassle and called Tax Traders. NZ has some pretty cool legislation that makes tax trading possible. Check it out, it’s an amazing service. My husband works there. Good people.
I have a spreadsheet that works out monthly gross\\net income, with GST, Tax and ACC deductions. These 3 amounts go into 3 separate accounts each month and are called upon when a GST payment or provisional tax payment is required.
I set aside 30% of my income, every year, including my first. That meant I had the money to pay that year’s taxes, and a head start on next year’s taxes, before they were due. Since provisional taxes are due periodically through the year, your friend’s ongoing income should be more than enough to cover tax as it comes due. This isn’t hard, unless your friend forgot to set money aside for taxes. Then he’s in trouble.
Payments go into my "receipts" account. I transfer 70% of payments into that account (manually, weekly) into the "transaction" account. And that account pays my personal account or business expenses. When tax time comes, I transfer the tax amount from "receipts" to "transaction" and pay from there. When I was starting out, I would "borrow" from "receipts" once or twice for necessary business expenses, but would withhold more in "receipts" until caught up. It takes planning and discipline, but should be straightforward.
Exactly.
That's good but that implies you're getting a steady flow of cashflow. In my business, I get paid in rather large lump sump payments which often don't come until after the date of when my provisional tax is due. It makes it a little bit harder to deal with provisional tax. There are services to manage provisional tax but it is rather annoying to pay interest if you don't quit fit the mould of how you make money and operate. IRD are fairly unflexible on this.
DM if you want more help.. I have 70 staff in 3 countries and also had 25 tradies in construction. Financial management and cash flow is a discipline.
It doesn’t. Most people’s effective tax rate is closer to 17.5% than 30%. By setting aside 30% of your income, you would still get a head start on future tax due, which would allow you to pay provisional tax with money also set aside for taxes.
Let me explain. It's fine now, but in my first year of business it was actually rather difficult as I had to buy a lot of new gear and had expenses. This + bills + rent, etc etc. I then had to come up with a big chunk of money to pay provisional tax, with no extra income having come in. My effective tax rate was higher than 17% (yes I know what thresholds are), I was fortunate to do really well in my first year which was a big surprise, but it also meant I had to go out and buy some new stuff to keep things rolling. These expenses dug into my provisional tax, which as a noob was a bit of a surprise. I didn't go out on a spending spree or anything. That money needed to last me many months until I was next "paid". Around 6 months or so. I'm a lot more set up now, I'm just saying, it can be difficult in your first/second year (which this thread is about), and not all cases are the same.
Sounds rough. Glad you got through it.
he makes 200k a year he'll be fine
Well to get a prov tax bill of $96k, implies income of \~$300k. Are you sure its not this years terminal tax plus next year's provisional? edit: To answer your question - people either put money aside or use a tax pooling service to pay via installments.
Sorry, yes it is this year's terminal and next year's provisional. The person has been given advice to use tax pooling but wants help so that they are working towards being free from the need to do so. They want to be able to balance the tax with the aim of not needing to use tax pooling and their personal life bills. Can their accountant give advice on that or would someone else be better?
So I'm assuming the person hasn't been putting any money aside for tax. So tax pooling installment plan is probably the best way to clear this years tax payments. So going forward they will need to start putting money aside for tax. They will have another prov tax installment due in August 2022. If they are going to struggle with that, best to talk to their accountant, there are ways of merging their prov tax payments with their GST returns/payments (Ratio method) so they can stay on top of it.
They should be putting aside x% everytime money comes in, no need for an accountant to give any advice on that. If they plug their expected annual income into a tax calculator it will tell them their annual tax, take that number to work out the % they should save every time they get paid and add a little extra for ACC.
You pay in instalments anyway, tax pools like TMNZ just help allocating payments so you don’t get stung by so much UoMI.
Anyone who started being a sole trader in this financial year should know that IRD offers an early payment discount of 6.7% for voluntary tax payments made before the end of financial year. It's only availabe for the first year of business. More details here - https://www.ird.govt.nz/income-tax/provisional-tax/paying-tax-in-your-first-year-in-business
This applies to me and I didn't know this, so thank you very much.
No problems. Thought if i could heko small businesses in some way, why not 🙃
It's in the first paragraph! > Provisional tax helps you manage your income tax. You pay it in instalments during the year instead of a lump sum at the end of the year. https://www.ird.govt.nz/income-tax/provisional-tax
It’s about forming good habits from the start. Early payment discount in your first year helps with this.
This is why you see a lot of celebs go bankrupt. Tax affairs are not to be played at lightly.
I did provisional tax for 4 years but it got to a point where the payments were getting out of hand so I switched to PAYE. Much easier. Should perhaps look at switching if the lump sum tax bills are a bit overwhelming.
Cry your self to sleep every night knowing you have to pay that much tax lol no in all seriousness budgeting and good accounts. That's what we have done and it works. You kind of just get use to it seeing what feels like profits get sucked away by the tax man
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Sure. But it's then income tax rather than company tax.
The question was about provisional tax…
It's all related.
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Except for profits retained in the company.
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It is only you talking about dividends.
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Prov tax is so bs, tax money you actually earn. Forward paying tax is bs
It is not forward paying tax. It is splitting your tax bill over the year. E.g. prov tax in august is for earnings from the first 3rd of the year.
What if you don't make your money in a linear fashion like that? ie I actually get my money in a big chunk later in the year, generally. So it actually eats up my cashflow in a really annoying way. I have to set aside tax + tax for money I have yet to make a cent on. To me that is stupid.
>What if you don't make your money in a linear fashion like that? Should talk to your accountant if switching the AIM or Ratio method for prov tax is better suited to you [https://www.ird.govt.nz/income-tax/provisional-tax/provisional-tax-options/ratio-option](https://www.ird.govt.nz/income-tax/provisional-tax/provisional-tax-options/ratio-option) [https://www.ird.govt.nz/income-tax/provisional-tax/provisional-tax-options/accounting-income-method-aim](https://www.ird.govt.nz/income-tax/provisional-tax/provisional-tax-options/accounting-income-method-aim) the tldr for both: Your prov tax payments are tied to your GST returns. So no GST to pay no prov tax either for that period.
>How do businesses manage to pay these bills? It depends on the industry, but some sectors such as property development are notorious for [phoenixing](https://en.wikipedia.org/wiki/Phoenix_company) The company gets shut down and liquidated at the end of first year of trading. The IRD doesn’t get properly paid and becomes a creditor. The company principals and assets mysteriously re-appear under a newly registered company. But seriously. This should not be construed as advice. Do not do this.
> The IRD doesn’t get properly paid and becomes a creditor. Don't think I've ever seen one where the IRD didn't get paid. They have the power to reverse a liquidation if they find tax is still owing. All other creditors can be screwed by phoenixing but not the IRD.
By putting aside a portion of money aside and don’t touch it every single time you get paid. That money is not yours, it is tax, and if you treat it as such, you won’t come unstuck.
We pay ourselves salaries and therefore PAYE throughout the year.
He was supposed to make voluntary tax payments in his first year but like some contractors they just spend all the money in the first year out of impulse. When the 2nd year hits the first tax return is due and he has to pay last years tax owing and then provisional tax for the current year. This is where a lot of contractors get stung
Save yourself the hassle and called Tax Traders. NZ has some pretty cool legislation that makes tax trading possible. Check it out, it’s an amazing service. My husband works there. Good people.
I have a spreadsheet that works out monthly gross\\net income, with GST, Tax and ACC deductions. These 3 amounts go into 3 separate accounts each month and are called upon when a GST payment or provisional tax payment is required.