Understanding the ratio option
The ratio option is one option to calculate your provisional tax. It lets you align your provisional tax payments with your business cashflow. It also bases your provisional tax payments on a percentage of your GST taxable supplies.
Businesses whose income fluctuates during the year may benefit from this option.
The ratio option will not suit all businesses. We recommend that you:
- consider how your business will be affected, and
- that it suits your specific business needs, or
- seek professional advice before choosing this option.
Who can use the ratio option?
You can use the ratio option to calculate your provisional tax if:
- you've been in business and GST-registered for all of the previous tax year, and part of the tax year prior to that
- your residual income tax for the previous year is greater than $2,500 and up to $150,000
- you file your GST returns every month or every two months
- you're not a partnership, and
- your ratio percentage that we calculate for you is between 0 and 100% (we'll let you know if it's not).
To use the ratio option you must meet all of the above criteria and let us know before the beginning of the income tax year.
We'll calculate the ratio percentage and let you know what this is before your first provisional tax payment due date.
If you choose to use the ratio option you must make provisional tax instalments every two months along with your GST. We'll send you a new GST and provisional tax return (GST103) for you to do this.
Ceasing the ratio option
You can stop using the ratio option at any time. If you stop using it:
- before the first provisional tax payment due date, you can choose to use the standard or estimation method to calculate your provisional tax, and
- the usual use-of-money interest rules will apply from this time.
You won't be able to continue using the ratio option if:
- you cease your GST registration
- any of your GST returns are overdue by 60 days or more
- your ratio percentage changes is no longer between 0% and 100% (we'll let you know if it's not)
- you change your GST filing frequency to six-monthly
- a return of income is filed or amended where the RIT is calculated at below $2,500 or above $150,000.
If you choose to stop using the ratio option you must let us know by phone or mail.
If the ratio option is ceased after the first provisional tax instalment dates you're required to use the estimation option to calculate the provisional tax for the remainder of the year.
Who will calculate the ratio percentage?
We'll calculate the ratio percentage for you by applying the following rule:
ratio percentage = [residual income tax from previous year ÷ GST taxable supplies from previous year] x 100.
We'll let you know your ratio percentage and any changes to it. Your ratio percentage may change from time to time as a result of assessments or reassessments of your GST or income tax for the previous year.
How will I calculate my provisional tax instalments?
Each time a provisional tax instalment is due, your GST and provisional tax return (GST103) will instruct you to calculate your instalment amount by multiplying your ratio percentage by your GST taxable sales figure for the latest two-monthly period.
Use-of-money interest when using the ratio option
If you apply the ratio option correctly and pay the provisional tax calculated using the ratio option, you won't:
- have to pay use-of-money interest (UOMI) if your provisional tax payments fall short of the end-of-year liability, or if you cease the GST ratio option. UOMI will apply from the date you cease using the ratio option
- receive UOMI if you pay too much provisional tax during the year as a result of using the ratio option.
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