Property Trader Provisional Tax Example

28 May 2015

• Joe Blogs has quit his day job (be very careful making this decision) and started trading properties.
• He has set up a company, Bloggs Trading Ltd.
• Between April 2014 and March 2015, Bloggs Trading Ltd bought, renovated and sold one property.
• The GST exclusive figures are sold for $450,000, and total costs $400,000, so a profit of $50,000.

Tax due

In this example, as Joe is doing all the work, the Company would most likely pay him a shareholder salary of $50,000. This $50,000 then becomes an expense to the Company, leaving it with a $0 profit and the $50,000 becomes taxable in Joe's name.

As this is Joe's first year of trading, and previously he had a PAYE job, he is new to provisional tax and is not required to pay any provisional tax from 1/4/14 to 31/3/15. As Joe uses a tax agent, he has until 7/4/16 to pay the terminal tax on the $50,000. Presuming the $50,000 is Joe's only income, he has $ 8,020 terminal tax due 7/4/16 (Click here to see IRD Tax on Annual Income Calculator on home page).

For the next year, (2016 tax year in this example) provisional tax assumes you earn the same profit as last year, plus 5% (if over $2,500 tax to pay). You also have to pay this tax over 3 instalments, 28/8/15, 15/1/16 and 7/5/16, so effectively you pay the tax due throughout the year.

If tax return for 2015 year filed after 28/8/15
Then the provisional tax gets spread over the two remaining payment dates 15/1/16 and 7/5/16, so $4,210 approximately each.

If tax return for 2015 year filed after 15/1/16 – RISK
Then the provisional tax all gets paid in the 7/5/16 payment. The big risk is that in this example there would be $8,020 terminal tax due 7/4/16 and then $8,421 provisional tax due 7/5/16. So $16,441 tax due within a month!

2016 year

As Joe has already paid $8,421 of provisional tax, any terminal tax due 7/4/17 is likely to be less. So for example, if Joe receives a shareholder salary of $60,000 for the 2016 year, the tax due is $11,020 less the $8,421 provisional tax paid. So there would be $2,599 terminal tax due 7/4/17. Provisional tax for the 2017 year would then be paid on the $11,020 due plus 5%.

Disclaimer:
This is just an example. There are many different structures that could be used as the trading entity (LTC, Trust , etc.) and also different ways the profit could flow to the owners. So this example is intended to show the terminal and provisional tax due on an example profit of $50,000, not the best structure to use.

Kind regards

Ross Barnett