How does provisional tax affect my loan application?

Provisional tax is the part of the New Zealand tax system that most often turns a good year into a cash-flow headache. You pay income tax for this year in instalments during the year, based on last year’s result. When your business grows, the bill grows — and it lands on fixed dates whether your customers have paid you or not. Naturally, lenders pay attention.

What is provisional tax, in one paragraph?

If your residual income tax (the tax left to pay after things like PAYE and tax credits) was more than $5,000 last year, Inland Revenue expects you to pay this year’s income tax in instalments rather than in one go after year-end. There are four ways to work it out — standard, estimation, ratio and AIM — and each has its own payment pattern.

When are the instalments due?

For a business with a 31 March balance date:

Option	Instalments	Due dates
Standard or estimation	3	28 August, 15 January, 7 May
Standard or estimation (six-monthly GST filers)	2	28 October, 7 May
Ratio	6	28 June, 28 August, 28 October, 15 January, 28 February, 7 May
AIM	Follows your GST or activity statement periods	Every one or two months

If a date falls on a weekend or public holiday, you can pay on the next business day. The tax due dates tool lays out your own next 12 months.

How does a lender factor provisional tax in?

In two ways.

As a fixed cost. When a lender works out whether your business can carry a repayment, it’s looking at what’s left after everything else. A large instalment due in January — right after the Christmas shutdown for many businesses — eats into that. Lenders who read your bank statements will spot the big IRD payments and plan around them.

As a signal. Paid instalments say tax is under control. Missed instalments become IRD debt, with late payment penalties and use-of-money interest, and lenders will ask about them. See can I get a business loan with an IRD debt?

What is the “second-year shock”?

It’s the classic trap. In your first profitable year you might not pay provisional tax at all, because you had no previous bill to base it on. Then, after your first return, you face the full year’s tax and the first instalments for the current year — close together. Owners who didn’t set money aside get a nasty surprise.

Our guide the second-year provisional tax shock explains it step by step and how to prepare.

Should I borrow to pay provisional tax?

It can be sensible when:

• the bill is a one-off spike, such as the second-year catch-up or a single exceptional year;
• your ongoing trading will comfortably cover future instalments;
• borrowing avoids penalties and protects your standing with IRD.

It’s less sensible when every instalment needs a loan. That suggests the option you’re on, or the business’s margins, need a look. Talking to your accountant about switching options (for example to AIM or ratio, if eligible) may help more than borrowing.

Ready to talk about funding a tax bill? Start a short enquiry — there’s no credit check involved.

How do I make provisional tax work in my favour with a lender?

• Know your option and dates. Lenders like owners who know what’s coming.
• Bring a myIR statement showing instalments paid or an arrangement in place.
• Show a tax account. A separate account where you set money aside is a strong signal.
• Time your application sensibly. Applying the week after a big instalment, with a lower balance, may need explaining — so explain it.
• Use your accountant. A short letter confirming your tax position can smooth larger applications.

An illustrative example: a January squeeze

The figures in this example are invented.

An electrician in Hamilton uses the standard option and has a 31 March balance date. His business had a strong year, so this year’s provisional tax is higher. His instalments fall on 28 August, 15 January and 7 May.

He plans to borrow in early December to buy a second van and take on an apprentice. A lender reading his statements notices three things:

1. a large IRD payment in late August;
2. a predictable dip in deposits from mid-December to mid-January, when most of his commercial clients shut down;
3. another large provisional tax instalment and the November-period GST, both due on 15 January — right in that dip.

None of that rules him out. But the lender will want to see that, after the 15 January payments, there’s still enough in the account to meet the new loan’s repayments through January and February. If there isn’t, options include a smaller amount, a different start date for repayments, or a facility sized with that squeeze in mind.

What helps him most: showing the lender a tax account with money already set aside for the January instalment, and a simple forecast for December to March.

Should I change my provisional tax option before borrowing?

Possibly — but for tax reasons first, not lending reasons. Your accountant may suggest:

• estimation, if this year’s profit will be clearly lower than last year’s;
• AIM, if profits are uneven and you’d rather pay only as profit is earned;
• ratio, if you’re eligible and want payments to follow GST turnover.

Each option changes the size and timing of payments, which in turn changes how a lender sees your cash flow. Make the change deliberately and tell the lender if you have.

Ask Mr about your tax-time borrowing

If provisional tax is squeezing your cash, or you’d like to borrow for something else without being caught out by the next instalment, tell us about it. Asking doesn’t touch your credit file, your enquiry goes to one person rather than a crowd of lenders, and a real specialist will ring to talk it through.

Please include any provisional tax owing, and the date of your next instalment, accurately on the form. It helps us suggest something that fits your tax calendar. See if your business qualifies.