NEW PROVISIONAL TAX PAYMENT OPTION – GST RATIO METHOD
The GST “ratio” method of provisional tax bases provisional tax payments on a percentage of GST taxable supplies. It enables provisional tax payments to be aligned with a business’s cash flow and reduces their exposure to use-of-money interest. When sales are up - more provisional tax is paid, when sales are down - less provisional tax is paid, thereby fluctuating to match seasonal trends.
The GST Ratio method is available from the start of the taxpayer’s 2008-2009 tax year. There are 6 instalment dates for payment of provisional tax using this option. For a standard March balance date taxpayer these due dates are 28th June, 28th August, 28th October, 15th January, 28th February, and 7th May.
The GST Ratio method is not recommended for close companies and trusts that vary income distributions to shareholders and beneficiaries from year to year as this affects the ratio calculation. THEREFORE MOST OF FRASER ACCOUNTING’S CLIENTS WILL NOT BENEFIT FROM CHANGING TO THE NEW METHOD.
The GST ratio used is the percentage figure obtained by dividing a taxpayer’s residual income tax for the preceding tax year by their total taxable supplies for the corresponding income year. A taxpayer’s GST ratio, including the initial ratio, must be calculated by the IRD. Please note, the definition of “total taxable supplies” includes sales of capital assets in the course of the taxable activity. In some circumstances the ratio can be adjusted where the sale price of a capital asset is more than 5% of the total taxable supplies.
Who cannot use the GST Ratio method?
- Recently GST registered taxpayer’s. Taxpayer’s must have been GST registered and trading for the whole of the preceding year (on which the ratio will be based).
- GST registered persons with a six monthly return period. The taxpayer must be filing GST either monthly or two monthly.
- Taxpayers whose calculated ratio is less than 0% or greater than 100%.
- Partnerships (as they are not income tax paying entities).
- Individuals who are not GST registered.
- Taxpayer’s whose residual income tax is less than $2,500 or greater than $150,000.
A provisional taxpayer who is eligible, and wishes to choose the GST Ratio method, must do so by giving the IRD a notice of election before the start of the tax year for which the GST ratio will be used e.g. for the ratio to apply from the GST period starting 1st April 2008 the election must be filed with the IRD before 31st March 2008.
If you are interested in adopting the GST Ratio method of paying your provisional tax, please contact your FRASER ACCOUNTING advisor for further information and to discuss whether it is appropriate for you.
Business Tip
The outside appearance of your business premises speaks volumes about what goes on inside the premises. Go outside and have a look. Is this the message you want to send to your customers, your suppliers and the public?
