Provisional Tax For Small Businesses
Need an extra hand managing your income tax? Well, provisional tax can help! Provisional tax can help you manage your income tax by paying instalments during the year instead of a huge lump sum at the end of the year.
So, how do you know if you have to pay provisional tax? You’ll have to pay provisional tax if you’ve had to pay more than $5,000 tax at the end of the year from your last return and $2,500 before the 2020 return. Your provisional tax is payable from the following year after your tax return.
If you earn self-employed income, rental income, income earned as a contractor, income from a partnership, or overseas incomes, then you most likely pay provisional tax. And in light of current events with COVID-19, the provisional tax threshold has been increased from $2,500 to $5,000. To allow you to hold onto your cash for longer, you won’t need to file your tax bill until the 7th of February the following year if your provisional tax payment is less than $5,000.
There are four options under provisional tax:
- The standard option is useful if your income is steady or increases over the next year.
- The estimation option is useful if you know that your income will decrease over the next year.
- The accounting income method (AIM) is for when you only pay provisional tax when your business earns a profit.
- And the ratio option is great if your GST registered, file monthly or bi-monthly return, and if your income tends to vary.
If you’re in your first year of business you will not need to pay provisional tax if you use the standard, estimation, or ratio options. However, if you use the accounting income method (AIM), you’ll only have to pay provisional tax when you make a profit. Though you’ll still need to pay income tax during your first year when you pay for your provisional tax in our second year of business. If you’re also down for a bonus, by making voluntary payments of tax during your first year of business you may be able to score yourself an early payment discount!
If you want to know more about provisional tax or want to chat with someone about your small business, give us a call on 049745056 or flick us a message.