IRD INTEREST RULES
In order to encourage taxpayers to pay the right amount of tax at the right time interest is charged to the taxpayer on any underpaid tax and conversely paid on any overpaid tax. These two-way interest rules apply to all taxes and duties.
In order to encourage taxpayers to pay the right amount of tax at the right time interest is charged to the taxpayer on any underpaid tax and conversely paid on any overpaid tax. These two-way interest rules apply to all taxes and duties.
1. Underpayments of tax
Interest is charged from the day after the original due date for the tax payment and only stops when the outstanding balance is paid in full.
2. Overpayments of tax
Interest on overpaid tax accrues from either the day after the original due date for the tax payment or the day after payment is made, whichever is later. In some cases you need to file a tax return before a refund can be made.
If this is the case, interest starts on the latest of:
3. Interest on provisional tax
For the 2020 tax year onwards, if you use the estimation method and your residual income tax (RIT) is greater than $5,000 or you're an initial provisional taxpayer for that income year and your RIT is greater than $60,000, interest is calculated from the day after your first provisional tax instalment date.
Note: This applies to individuals and non-individuals.
Interest when using the accounting income method (AIM)
Credit interest isn't applied to provisional tax overpayments when using AIM.
If you underpay your provisional tax when using AIM, debit interest applies from the day after the due date for the instalment.
Interest when using the standard option
If your RIT is less than $60,000 credit and debit interest accrues from the day after the end-of-year tax due date.
If your RIT is $60,000 or more credit and debit interest accrues from the final instalment date.
Interest is calculated on the difference between the provisional tax paid and the RIT.
Note: The $60,000 threshold was $50,000 for the 2010 to 2017 tax years.
For late of missed provisional tax payments, interest is charged from the day after the instalment due date on the lesser of:
4. New provisional taxpayers
There are special rules that determine the time interest starts for new provisional taxpayers who have started a taxable activity during the year.
Refer to Provisional tax guide (IR289) for more information.
If you use the estimation method and your RIT is more than $5,000 or your RIT is $60,000 or more and you're an initial provisional taxpayer for that particular income year interest is calculated from the day after your first provisional tax instalment date.
The $50,000 RIT threshold for individuals using the standard option has increased to $60,000 when determining the interest start date. The $60,000 threshold will also apply to non-individuals.
5. When UOMI applies from using the standard method (and required payments made in full and on time)
Interest is charged from the day after the original due date for the tax payment and only stops when the outstanding balance is paid in full.
2. Overpayments of tax
Interest on overpaid tax accrues from either the day after the original due date for the tax payment or the day after payment is made, whichever is later. In some cases you need to file a tax return before a refund can be made.
If this is the case, interest starts on the latest of:
- the original due date
- the day after the payment that generates the refund is made, that is when the credit becomes available
- the date the return is filed.
3. Interest on provisional tax
For the 2020 tax year onwards, if you use the estimation method and your residual income tax (RIT) is greater than $5,000 or you're an initial provisional taxpayer for that income year and your RIT is greater than $60,000, interest is calculated from the day after your first provisional tax instalment date.
Note: This applies to individuals and non-individuals.
Interest when using the accounting income method (AIM)
Credit interest isn't applied to provisional tax overpayments when using AIM.
If you underpay your provisional tax when using AIM, debit interest applies from the day after the due date for the instalment.
Interest when using the standard option
If your RIT is less than $60,000 credit and debit interest accrues from the day after the end-of-year tax due date.
If your RIT is $60,000 or more credit and debit interest accrues from the final instalment date.
Interest is calculated on the difference between the provisional tax paid and the RIT.
Note: The $60,000 threshold was $50,000 for the 2010 to 2017 tax years.
For late of missed provisional tax payments, interest is charged from the day after the instalment due date on the lesser of:
- the amount of the instalment less the amount paid, or
- your RIT divided by the number of instalments for the tax year less the amount paid.
- you're associated to specific persons or entities with one of you being a company and they aren't covered by the above standard option rules, or they don't use the GST ratio option, or
- you are in a provisional tax interest avoidance arrangement.
4. New provisional taxpayers
There are special rules that determine the time interest starts for new provisional taxpayers who have started a taxable activity during the year.
Refer to Provisional tax guide (IR289) for more information.
If you use the estimation method and your RIT is more than $5,000 or your RIT is $60,000 or more and you're an initial provisional taxpayer for that particular income year interest is calculated from the day after your first provisional tax instalment date.
The $50,000 RIT threshold for individuals using the standard option has increased to $60,000 when determining the interest start date. The $60,000 threshold will also apply to non-individuals.
5. When UOMI applies from using the standard method (and required payments made in full and on time)
Provisional tax amount more than RIT
If end-of-year RIT is
|
Provisional tax amount less than RIT
If end-of-year RIT is
|
If you've paid all but your final instalment on time using the standard option then UOMI will apply from the final instalment due date.
6. If you use the estimation option
- IRD may charge interest from the first provisional tax instalment date if you use the estimation method.
- If you underestimate, IRD may charge you penalties and interest on the difference, from the provisional instalment dates. You may be charged even if you paid your estimated provisional tax in full and on time.
- If you overestimate, you will be entitled to receive any interest due. If you overestimate, you are treated as having taken reasonable care in making the estimate.
7. Tax-deductible interest
Any interest charged on underpayments of tax is deductible for business purposes, subject to the normal deductibility provisions, during the income year it is charged in.