What the heck is Terminal Tax?

No, it won’t kill you.

Terminal tax is the tax you pay at the end of the year. It’s what’s traditionally thought of as your ‘tax bill.’

It’s calculated when you or your accountant prepares your annual tax return.

If you’ve paid tax throughout the year, either provisional tax or PAYE, then your terminal tax is a final ‘wash-up’ payment to cover the difference.

It’s based on your actual final tax return calculation.

When is it due? April or July

Depending on whether you have an accountant or not, your terminal tax bill will be due for payment by the 7th of July (without an accountant) or the 7th of April (with an accountant).

The additional nine months you get to pay this bill if you have an accountant is pretty significant.

You must remember that your tax return AND terminal tax are due by the 7th of July if you don’t have an accountant.

That leaves you with only three months to prepare your tax return, file it with Inland Revenue, and then pay the bill too.

That’s a lot to do in a short space of time.

Terminal tax is the final tax paid for the year. It's a 'wash-up' tax.

How can you reduce your terminal tax? You can pay more tax through the year…

Terminal tax is the difference between how much tax you paid during the financial year, compared to your final tax calculation result which is only known once your tax return has been prepared and filed.

If you pay provisional tax or PAYE during the year, this is deducted against your final tax calculation result.

Hence, the more tax you pay during the year, the less terminal tax you have to pay.

So when thinking about provisional tax, your accountant will tell you through the year how much you need to pay.

However.

If you can pay more than this, you will have less to pay later.

Less to think about and less chance of falling into tax arrears and being charged penalties.

Here’s my article on provisional tax if you want to understand more.

Avoid the 7th Kiss of Death….

If business has been going well and you’re paying more than $60,000 in provisional tax currently, or you expect to do so in the near term…. Listen very carefully.

You will have big tax bills due on the 7th of April and the 7th of May that you need to be ready for.

The tax due on the 7th of April is your terminal tax for the previous financial year.

The tax due on the 7th of May is your final provisional tax instalment for the current financial year.

If your tax bill is $60,000 or more, the rules state that your terminal tax MUST be paid by the 7th of May, rather than in April the following year.  

Confusing aye.

That means you need to work out your final tax bill by this date.

Leaving you with not much time.

It’s really important to get this number right because if you underpay it, you will be charged hefty penalties by Inland Revenue.

The penalties are often large because you or your accountant will do an initial calculation before the payment is due in April or May and then take a few months to prepare your tax return and do the actual final calculation.

This time period is dangerous as it allows the penalties and interest on the underpaid amount to grow.

HOWEVER, all can be avoided if the initial calculation is correct.

Ok, you think you’ll pay late or not have the full amount… Don’t worry, there’s tax finance

If you think you’ll pay late or underpay due to a shortage of cash, you have options, pretty good ones too.

There are what’s called ‘Tax payment intermediaries’ in New Zealand.

These guys will help finance your tax bills, usually saving you significant Inland Revenue penalties and interest in the process.

Obviously, they take a fee themselves, but it’s way less than what IRD will charge you.

I work with these guys all the time and they are an important part of paying tax in New Zealand now.

The most common ones are TaxTraders and TMNZ.