Residual vs Provisional vs Terminal taxes – confused?

If you’re not dealing with the subject every day, it’s difficult to understand, and you’re not alone!​

We often find that when explaining types of taxes to clients, it seems logical and understandable. However, uncertainty creeps in later about why these taxes have different names.​

Here’s a quick guide to the terminology.​

We always want to make things as clear as possible, but sometimes we can’t avoid using certain expressions. Our blog, What’s your accountant talking about? sets out simple explanations and gives examples of how we may use the phrases.​

Let’s start from the end and work our way through the terms. There’s a worked example in the last section.​

First up – we need to know how much overall tax you need to pay as an individual taxpayer. This is based on your taxable income, which can come from a number of sources. We see the following income sources most often, but the list isn’t exhaustive:​

From here, we can deduct certain expenses:​

The result is your Taxable Income.​

Once we have your individual taxable income, we calculate the tax. Inland Revenue sets the tiers and percentages.​

And so, we arrive at your Tax on Taxable Income.​

This is paid for in different ways - through tax deducted at the source, provisional tax, and terminal tax.​

When companies distribute dividends to its shareholders, they are required to distribute these at 33%. However, the company tax rate is currently 28%. So this extra 5% has to be payable as a top up by the company at the time it declares the dividend to the shareholders.​

When you receive a dividend statement from a company or investment, you will notice there is usually always RWT and Imputation credits. This RWT is actually the dividend withholding tax – just to confuse you!​

You can find out more about dividends in our blog – Dividends and Imputation Credits.​

If your Residual Income Tax (RIT) is higher than $5,000, you fall into the provisional tax regime.​

This is probably the most difficult to get your head around. You’re thinking about the current tax year, but we’re asking you to pay tax for next year! We’re making sure you meet the Inland Revenue’s tax requirements and keeping any interest and penalties charged to the bare minimum – preferably nil.​

What you’ve been (hopefully) doing, is paying the requested amounts to reduce your final 2024 tax payable to Inland Revenue.​

Here’s where the timing gets confusing.  For the 2024 tax year, your provisional tax payments will have been August 2023, January 2024, and May 2024*. Your final tax bill for the 2024 year will be due in April 2025 (or February 2025**).​

For the 2025 tax year, we’ll be asking you to pay as follows:​

It feels like you’re paying tax all the time, and you probably are! We have a separate blog explaining the timing.​

The standard requirement is for the taxpayer to pay the prior year RIT (see further below) plus 5%. If that prior year return hasn’t been filed, they’ll go back to the year before that, plus 10%.
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* Except if you prepare your GST returns every six months (your provisional tax will only be due twice a year)
** If you don’t have Extension of Time​

This is the remaining 2024 tax to pay on 7 April 2025 (or 7 February 2025 if you don’t have the Extension of Time). It’s your Total Tax to Pay (i.e. tax on taxable income) less Tax Paid at Source (by others e.g. employer, bank, investments) less Provisional Tax (tax you’ve paid in advance for that income tax year).​

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