The Flaw In The Provisional Tax System For Property Investors

The first provisional tax payment is due on 28th August, this is either:

• If 2024 tax returns have been filed, then based on 2024 plus 5%. If under the $5,000 Residual Income Tax (RIT) threshold for the 2024 year, then will be $0 [many property investors will have losses or low profit, and no provisional tax due!]
• Otherwise based on 2023 plus 10%. If under the $5,000 Residual Income Tax (RIT) threshold for the 2023 year, then it will be $0.

The Major Flaw

2023 was 75% Interest limitation rules, 2024 is 50%, and then 2025 is back to 80%. So, if you are making a profit, having to pay provisional tax and are affected by Interest Limitation, then provisional tax won’t make sense. See below for smarter ways to do this.

If you have losses, or under $5,000 RIT, or not affected by Interest Limitation (new build, social housing, profit from business) then you can stop reading.

A Property Investor with exactly the same number shows how the tax due changes as a result of Interest Limitation rules.

For year ending 31/3/23 (2023 tax year), this tax payer would have $19,800 tax due if at 33% tax rate, based on 75% of interest being claimable under Interest Limitation rules

• 2024 year would be $36,300 tax due, as only 50% interest claimable.
• 2025 year would be back down to $16,500, as 80% interest claimable.

The best trick is to delay filing the 2024 tax return until 20/1/25. This way the August 2024 and January 2025 provisional tax will be based on the 2023 year plus 10%. So would pay $7,260 for each instalment, or $14,520, instead of paying $12,705 each instalment or $25,410. As long as these two payments are paid on time, there will be NO interest and NO penalties, even if profit somehow ended up being a lot higher. So, NO risk to delay filing.

This would then just leave the 7/5/25 final provisional tax payment to review and consider.

The second trick is don’t estimate! If you estimate and get it wrong, there can be large penalties and interest. So instead on 7/5/25, we would normally review the expected 2025 profit, and then pay the lower tax that we expect. In the worst case if you get the payment amount wrong, then can use Tax Management NZ to pay the extra tax and just pay interest to Tax Management for the few months we are short and be no penalties.
So, following the example, we expect $16,500 tax due for the year, and have already paid $14,250 of provisional tax through the August 24 and January 25 payments, so would only pay $1,980 on 7/5/25 for the final provisional tax.

IRD would be looking for a larger payment, but as soon as 2025 tax return is filed, then it would balance up.

Cashflow savings using these tips

• 28/8/24 pay $7,260 in the example above compared to $12,705 if had filed a 2024 tax return.
• 15/1/25 pay $7,260 in the example above compared to $12,705 if had filed a 2024 tax return.

A common question, will we end up with a huge tax bill on 7/5/25? Normally, we don’t like to delay filing as it can create huge tax bill on 7/5/25 which is just after the 2024 terminal tax date of 7/4/24. But in this case, we are only doing this as you are affected by Interest Limitation, which we know has already changed from 1/4/24 to 80%.

If you are our client and are affected by Interest Limitation, you will notice that when we complete your 2024 tax returns, we will have put a 20/1/25 filing date in your tax return, so that our system doesn’t file your tax return until that date. We have also shown the expected 7/5/25 tax payment on our cover letter.

One big benefit is if you are currently not allowed to claim any interest as existing property without exemptions purchased 27/3/21 or after, you will go from a 0% interest claim in the 2024 year, to 80% in the 2025 year. So, if you have provisional tax worth discussing with us, and in many cases, we will just pay $0 provisional tax, knowing that you will get 80% interest claim in 2025 year. Or, if you are making a good profit, at least we will be able to pay less on 28/8/24 and 15/1/25, and as above we won’t estimate. 

Article by Ross Barnett

Disclaimer: This article has been prepared for the purpose of providing general information, without taking into consideration any particular person's objectives, financial situation or needs. Any opinions contained in it are held by the author as at the report date and are subject to change without notice.