Provisional Tax & PAYG Instalments Explained

There's a specific moment that catches out a lot of ecommerce owners: your first really good year, followed by a tax bill that's roughly twice what you expected.

You didn't miscalculate. You've entered the instalment system, and nobody warned you what that does to your cash flow.

What is provisional tax? (New Zealand)

Provisional tax means paying next year's income tax in instalments during the year, rather than in a lump sum afterwards.

You enter the system when your residual income tax exceeds $5,000 — broadly, when you owe more than $5,000 after any tax already deducted at source.

There are a few calculation methods. The standard method is the common one: you pay based on last year's tax, uplifted by a set percentage. There's also an estimation method, and a ratio option linked to GST for some businesses.

What are PAYG instalments? (Australia)

The same idea. PAYG instalments are pre-payments toward your income tax, paid through the year rather than in one hit at the end.

The ATO notifies you when you enter the system — you don't opt in. Instalments are generally reported and paid through your BAS, alongside your GST.

Why does my second year feel so much worse?

This is the part that actually causes the damage.

In your first properly profitable year, you owe the tax on that year's profit. Fine — if you set money aside, you're covered.

But entering the instalment system means you also start paying toward the following year, and the first instalments often fall close to when the previous year's bill is due.

So in the changeover year you can face:

Last year's tax bill, in full
Plus the first one or two instalments toward this year

Both landing within a few months. If you budgeted for one, this is where it hurts — and it happens precisely when the business is growing and cash is already tied up in stock.

A rough illustration

A New Zealand store, simplified:

Year 1: $40,000 profit → around $11,200 tax. Paid after year end.

Year 2: profitable again, and now in provisional tax. Across that year you might pay:

The Year 1 balance
Plus instalments toward Year 2, based on Year 1 uplifted

Cash out in that window is well above one year's tax, even though nothing has gone wrong. It's a timing shift, not extra tax — but timing is what kills small businesses, not totals.

How do I stop it hurting?

Set aside more in your first good year. The standard 25–30% of profit covers your bill. In the year you enter instalments, you need that plus the first instalments. Budgeting 35–40% through that transition year is a reasonable buffer.

Ask your accountant when you'll enter the system. They can usually see it coming a year out. Being told in advance turns a crisis into a plan.

Keep the tax account genuinely separate. See how much to set aside. This is the year that method earns its keep.

Consider estimating if your year is worse. Both systems base instalments on last year. If this year is materially down, you may be able to reduce them rather than overpaying and waiting for a refund. Get advice first — estimating too low carries interest.

Don't ignore a notice. Both IRD and the ATO offer arrangements, and both are far more accommodating before a due date than after.

Does this apply to me if I'm a sole trader?

Yes. Both systems apply based on the tax you owe, not your structure. A sole trader with a good year enters instalments the same way a company does.

The connection to knowing your profit

Every number here depends on knowing your actual profit as you go.

If you only find out what you made when your accountant finishes the year, you learn about your instalment obligation months after you could have done anything about it. Owners who track profit monthly see the good year happening and can set aside accordingly — which turns the instalment transition into an inconvenience instead of a crisis.

That's the case for tracking continuously rather than retrospectively, whether you do it in a spreadsheet or with something like Rev Room, which shows running profit and tax set-asides for NZ and Australian Shopify stores.

The short answer

NZ: provisional tax starts when residual income tax exceeds $5,000
AU: the ATO notifies you; instalments are paid through your BAS
The changeover year is the painful one — last year's bill plus this year's instalments
Budget 35–40% of profit through that transition, not the usual 25–30%
Ask your accountant when you'll enter the system, before you do

General information only, current as at 20 August 2026. Thresholds, rates and calculation methods change and depend on your circumstances. Check ird.govt.nz or ato.gov.au and talk to your accountant.