Accounting and TaxAgriBusiness

Significant changes to provisional tax already in effect for farmers

22 March 2019
3 min read

With the Inland Revenue Department (IRD) unveiling the new provisional tax rules that took effect at the start of this financial year, farmers should be satisfied with sensible adjustments to the rules. The new regime means that if you pay provisional tax using the standard uplift method, which uses the previous year’s liability with five percent uplift, you will no longer suffer high interest if your tax predictions are incorrect.

You do not need to pay tax unless you are making money, and with profits rising after a number of lean years, farmers will be reaching a position where they will be required to pay tax, particularly in the dairy industry.

The biggest change applies to what the IRD refers to as the “safe harbour” which relates to those who have an actual income tax liability of less than $60,000 and have paid the amounts of tax required as per the standard method at the three provisional tax dates for that year. They will no longer be charged IRD interest if they miscalculated and did not pay enough provisional tax, as long as the final balance is paid by the terminal tax date.

Two important changes to note are an increase from $50,000 to $60,000 for the safe harbour threshold and the inclusion of all taxpayers, so it does not just apply to individuals.

The other major change applies to medium to large taxpayers – those that have an actual income tax liability of $60,000 or more and have paid their provisional tax that year based on the standard method. Once again interest will not be charged by the IRD if you paid the amount of tax due using the standard method at your first and second provisional tax dates for that year. Interest will only apply from the third provisional tax date on any underpayment of the total tax liability at that date.

For many farmers, the first instalment of provisional tax under the new regime will be due on October 28th 2017, so it is imperative farmers are up to date, and understand how the new rules will affect them. There are many subtle nuances in the rules, which without careful planning could result in the payment of more interest than is necessary.

That being said, the new regime only applies if you meet your uplift method payments, and has no remedy for those who have cashflow constraints, meaning they are unable to make the correct payments on time.

With the new regime already underway and first instalments looming, it is important all businesses ensure they understand how the changes could affect them, and what their best foot forward using the new rules should be.