Many of our clients have 2025 provisional tax due on 15 January 2025 for the 2025 financial year. This article outlines provisional tax, who needs to pay it, and how it is calculated. We also include several examples which may apply to your situation. Please note that this article provides a general overview of provisional tax rules. Individual circumstances are required for more specific and tailored tax advice.
What is Provisional Tax?
Provisional tax ensures taxpayers pay their income tax in instalments throughout the year rather than a large lump sum at the end. Effectively, IRD wants their money paid during the year rather than at the end of the year.
Who Needs to Pay Provisional Tax?
You may need to pay provisional tax if you have income that’s not automatically taxed at source (like PAYE or withholding tax). This includes income from cryptocurrency.
How to Determine if You’re a Provisional Taxpayer
You’re typically a provisional taxpayer if your residual income tax (the tax you owe after all deductions) is over $5,000 in the previous financial year.
For example, if in the 2024 financial year, you had $10,000 of tax to pay, you will have a 2025 provisional tax liability of $10,500.
Calculating Your Provisional Tax Payments
There are two main methods to calculate your provisional tax payments:
Standard Uplift Method:
IRD automatically calculates this for you.
It involves taking your previous year’s residual income tax, adding a 5% uplift
You normally have three instalments paid during the year
Estimation Method:
You estimate your expected residual income tax for the upcoming year.
Divide this estimated amount by the number of instalments to determine your payment amounts.
When are Provisional Tax Payments Due?
Provisional tax payments are typically due on the following dates:
28 August
15 January
7 May
What Happens if You Underpay or Overpay?
Underpayment: You may incur penalties and interest from the IRD.
Overpayment: You’ll receive a refund when you file your tax return.
Example Overpaying Provisional Tax
Joe earned $100,000 in the 2024 financial year, including income from cryptocurrency investments. He had a residual income tax of $6,000.
Provisional Taxpayer Status: Since his residual income tax is over $5,000, Joe becomes a provisional taxpayer for the 2025 financial year.
Choosing a Method: Joe opts for the standard uplift method.
Calculating Instalments:
Uplift amount: $6,000 + 5% = $6,300
Instalment amount: $6,300 / 3 = $2,100
Joe’s Payment Schedule:
2024: Pays $6,000 residual income tax.
2025:
28 August: $2,100 (instalment 1)
15 January: $2,100 (instalment 2)
7 May: $2,100 (instalment 3)
Joe’s 2025 Tax Situation
At the end of the 2025 financial year, Joe’s residual income tax was only $2,100.
Payment Status:
2024 Residual Income Tax: Paid in full.
2025 Provisional Tax Instalments:
First two instalments: Paid.
Third instalment: Not yet paid.
Refund:
Joe will receive a refund for the second 2025 provisional tax instalment, as his actual tax liability is lower than the standard uplift amount paid. Joe does not need to pay the third instalment.
2026 Tax Status:
Since Joe’s 2025 residual income tax is below $5,000, he is not a 2026 provisional taxpayer
Example: Underpaying Provisional Tax
Let’s say Joe earned $100,000 in the 2024 financial year, including income from cryptocurrency investments. He had a residual income tax of $6,000.
Provisional Taxpayer Status: Since his residual income tax is over $5,000, Joe becomes a provisional taxpayer for the 2025 financial year.
Choosing a Method: Joe opts for the standard uplift method.
Calculating Instalments:
Uplift amount: $6,000 + 5% = $6,300
Instalment amount: $6,300 / 3 = $2,100
Joe’s Payment Schedule:
2024: Pays $6,000 residual income tax.
2025:
28 August: $2,100 (instalment 1)
15 January: $2,100 (instalment 2)
7 May: $2,100 (instalment 3)
Joe’s 2025 Tax Situation
At the end of the 2025 financial year, Joe’s residual income tax was $16,000. He has had a fantastic year from his cryptocurrency investment, and he has chosen not to pay the 2025 provisional tax.
Payment Status:
2024 Residual Income Tax: Paid in full.
2025 Provisional Tax Instalments:
28 August: $2,100 (instalment 1) – not paid
15 January: $2,100 (instalment 2) – not paid
7 May: $2,100 (instalment 3) – not paid
Outcome
Because Joe had a liability to pay the 2025 provisional tax but has not paid it, he will be subject to a late payment penalty on each instalment date that he has not paid. He will also be subject to IRD use of money interest (10.91% pa) on the underpaid tax.
In this situation, Joe was aware of these provisional tax liabilities but chose to keep his funds invested in cryptocurrency (and pay potential interest costs) rather than pay the provisional tax. He was aware of this risk, and it was a calculated strategic decision. This position has significant risks, especially if the market were to decrease.
After Joe’s actual 2025 result is calculated, he decides to pay his taxes, including the provisional tax. We recommend that Joe use tax pooling to buy backed tax to mitigate IRD late payment penalties and interest costs.
Key Takeaway:
Unlike traditional investments, the cryptocurrency market is volatile and unpredictable. To ensure compliance with IRD regulations and mitigate penalties, it’s crucial to understand provisional tax and to implement effective tax planning strategies.
Please contact us if you’d like to discuss your 2025 provisional tax payment obligations.
Contact Us
Contact Tim Doyle for a call or meeting to discuss any cryptocurrency tax or accounting questions. Our office is in Cambridge, Waikato, or we can arrange a video conference call.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
