Safe Harbour & when your tax is due to the Inland Revenue

No this doesn’t have anything to do with boating or shelter!

‘Safe harbour’ is a term used by Inland Revenue to determine when a provisional taxpayer becomes subject to use of money interest on income tax.

In short, this rule is what gives tax payers the extension of time to pay their income tax by 7 April the year following end of financial year (ie for YE31.03.2023, terminal tax isn't due until 07.04.2024) and determines when interest is charged on any late payments of provisional tax.

There is an exception to this rule.

First off, lets clarify the different types of taxes

Residual Tax

Residual tax is calculated as total tax owing for a personal or other entity, less any tax paid at source. Examples of taxes paid at source include PAYE taxes for employees, and withholding tax (for contractors plus on interest or dividends).

Terminal Tax

Terminal tax refers to the final amount of income tax owed for a given tax year. Simply, this is calculated as residual tax less provisional tax already paid in that tax year.

Terminal tax is due by 7 February each year, however if you’re attached to a tax agent (ie accountant), in most cases you get an extension of time to pay this tax by 7 April.

Provisional Tax

Provisional tax is a system of paying income tax in New Zealand that is based on an estimate of the tax liability for the current tax year. In most cases, the standard uplift method is applied, which calculates provisional tax due for the year as last years residual tax amount plus 5%.

The due dates for these installments are typically in August, January, and May of each year.

Taxpayers are only subject to paying provisional tax if their residual tax bill exceeded $5,000 in the previous financial year therefore provisional tax doesn’t apply to new businesses in their first year of business.

Safe Harbour Explained

If you personally, or your company/trust will have income that results in residual tax owing of $60,000 or more, you do not get the extension of time to pay your tax!

Your tax for that financial year is due in full on the third provisional tax installment date of 7 May

For example - Tax year ending 31.03.2023; the remaining tax is due by 07.05.2023.

If tax is short paid, any outstanding tax balance will incur use of money interest from the IRD. The current rate charged by the Inland Revenue is 9.21% on any short-paid tax (at the time of writing this).

You can view the use of money interest rates from the IRD using this link.

Disclaimer: this is general information only. Please reach out to Prosper Business for specific advice to your situation.