The ratio option lets you match your provisional tax payments with your business cashflow. It also bases your provisional tax payments on a percentage of your GST-taxable supplies. You need to let us know you want to use this option at the beginning of the tax year.
Who can use the ratio option?
The ratio option is useful if your income varies or you have seasonal income. You must meet all these criteria to use it:
- You've been in business and registered for GST, for the whole of the previous tax year, and part of the tax year before that.
- Your residual income tax (RIT) for the previous year, 2020 or later, is greater than $5,000 and up to $150,000.
- You file your GST returns monthly or 2-monthly.
- You're not a partnership.
- Your ratio percentage that we calculate for you is between 0 and 100% (we'll let you know if it's not).
Applying to use the ratio option
You need to apply in writing, via myIR or by phone. You'll need to make sure you:
- tell us the year the election is to start
- make the request at or before the beginning of the income year the ratio election is for.
If you want to use the GST ratio method, you must meet all the requirements and elect to use it before the start of your income year.
For example, if you have a 31 March balance date and wish to use a GST ratio for the 2021 year - you need to inform us of your election on or before 31 March 2020. The start or effective date will be the first day of the income year after the date the election was made - the date we received the request. We cannot backdate the effective date.
Ceasing the ratio option
You can stop using the ratio option at any time. You just need to let us know by phone or email.
If you stop using it before the first payment due date, you can choose to use the standard or estimation option to calculate. The usual use of money interest rules will apply from this time.
If you stop using it after the first payment date, you must use the estimation option to calculate for the rest of the year.
You must stop 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 change is no longer between 0% and 100% (we'll let you know if it's not)
- you change your GST filing frequency to 6-monthly
- a return of income is filed or amended where the residual income tax is calculated at below $5,000 or above $150,000 from the 2020 year.
Use of money interest when using the ratio option
If you apply the ratio option correctly and pay the provisional tax calculated, you will not:
- need to pay use of money interest (UOMI) if your payments fall short of the end of year liability or you cease the GST ratio option. Use of money interest will apply from the date you cease using the ratio option.
- receive use of money interest if you pay too much during the year because of using the ratio option.
For more detailed information, read our Provisional tax guide – IR289 and GST and provisional tax quick reference summary sheet - IR235.