This year and the next two or three may present a lot of challenges to business owners. Depending on the industry you are in, you may be already feeling the decrease in turnover as customers are being a lot more cautious with their money.
This brings us to a very interesting position, because yes, we need to pay tax and the ongoing tax such as GST and PAYE will need to be paid no matter what, but your Income Tax obligation can potentially shrink quite significantly compared to the previous year.
In the next month, August 2022, your accountant will issue you with a Provisional Tax notice. The Provisional tax is a regime of prepaying your Income tax for the year ahead. Let me demonstrate it in the example:
Ben and Co Limited had taxable income of $100,000 for the year ended 31 March 2022. The Income tax on this amount is $28,000, which is payable to the IRD. The 2023 Provisional tax amount will be calculated as $28,000 plus 5 percent, this is called standard uplift and the idea behind it is that IRD expects you to do better each year by about 5 percent. Therefore, the Provisional tax for this business will be $28,000 + 5 percent= $29,400.
The Provisional tax payments are made to the IRD in three instalments and on the specific dates being 28 August, 15 January and 7 May. So, in our example we have total provisional tax to pay of $29,400. This amount will be split into three instalments and therefore the accountant will notify Ben and Co Limited to pay $9,800 on 28 August 2022, and $9,800 on 15 January 2023 and $9,800 on 7 May 2023.
All makes sense, BUT… What if you are not making the same amount of money this year and your profit is down due to economic changes in the country or changes in your industry or perhaps you have not got employees to fulfil ill the positions and therefore your turnover and profit is nowhere near the last year’s results?
Get in touch with IRD
If this is the case for you, and you do receive a provisional tax notice from your accountant, I would suggest getting in touch with them and letting them know that the things are not going as well as last year and that you want to recalculate your provisional tax payments based on the business performance in the first four months of the year and also let your accountant know your expectation of what may be happening with the business for the rest of the year.
So how can business survive a recession and an economic downturn?
The three main areas that are extremely important during tough times are:
- Meticulous management of business costs. You need to know what metrics to watch and what the numbers are actually telling you.
- Management of your time. You have 24 hours each day, everyone gets the same allocation, if you use these 24 hours to your advantage it always translates into excellence.
- Excellent Customer Service, which will bring repeating business and referrals.
I wish you all the best and if you have any questions please flick me an email:
Related: A quick history of tax, just in case you were wondering…
