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Provisional Tax Changes - Accounting Income Method (AIM)

May 30, 2016

At a Pre-Budget 2016 speech in April 2016, the Prime Minister, the Rt Hon John Key, announced the release of a business tax package which includes proposals to simplify business tax. One of the proposals allows businesses to use the Accounting Income Method (AIM) to pay provisional tax through their accounting software (applies from 1 April 2018).

Under AIM, businesses with gross income less than $5m can use their accounting software to calculate their tax payments throughout the year. Tax payments will be based on accounting income instead of being a separate calculation. Businesses which choose to use AIM will make payments more regularly throughout the year. If they make the payments calculated by their software, they will not be liable for use of money interest.

How often do I pay?

Businesses using AIM will make provisional tax payments more often. Provisional tax payments will be due monthly for businesses paying GST monthly. Businesses not registered for GST or paying GST every two or six months will pay provisional tax every two months.

Calculating tax adjustments

Traditionally many tax adjustments are only identified and calculated at year end. However, most of the information required to calculate these adjustments is actually available when it is entered into software and doesn’t need to wait until year end.

Software will be designed to help businesses and their advisors choose the correct tax treatment for a transaction. For example an alert could trigger saying “please check with your advisor” or “last year you coded this as…”. A tax advisor might be able set up an alert whenever something is coded to a particular account to review the treatment chosen by a business.

Use of money interest

A business using AIM to calculate and pay provisional tax will not be charged use of money interest unless the business has failed to pay the instalments as calculated under AIM.

It is expected that businesses who use AIM will either no longer have terminal tax liabilities (on the basis that their tax payments will be made in near real-time, and based on actual results), or there will be a small difference between their provisional tax payments and their final liability.

Refunds in AIM

AIM provisional tax payments are calculated using current year income and therefore reflect fluctuations between profit and loss throughout the current year. Where a business has periods of income and pays provisional tax and then has accounting losses in the next period, it is entitled to request a refund of the overpaid tax in the current year. Inland Revenue will refund over payments of tax where required throughout the year in much the same way as GST is currently refunded. A business can only seek a refund of tax it has already paid.

Submitting information to IRD

It is expected that most software packages will automatically map information from accounting records and forward it to Inland Revenue at the time of the payment. Inland Revenue will not be able access the raw data held within the software itself and just receives an electronic version of the preagreed form.

Benefits for small businesses

AIM will be great for startups that have a tenuous future because they only pay tax on results they have achieved. AIM should also work well for businesses that are seasonal because the payment of taxes adjusts to the season.

AIM will also be responsive to changing business conditions. If economic conditions tighten and a business’ tax liability drops, Inland Revenue will refund overpayments, in much the same way that GST refunds are handled.

With the advent of cloud accounting solutions such as Xero, financial information is up-to-date and at your fingertips. AIM uses that power to enable the calculation of provisional tax liabilities from a business’s latest available financial information.

Tim Appleton

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