Only pay provisional tax when you're making a profit – a new provisional tax option for small businesses
Over the coming weeks you will see and hear more about AIM from software providers and the Inland Revenue Department.
The AIM provisional tax method does not suit all businesses, we will contact you directly if we believe it could be of benefit to you.
We are reviewing our services to help meet the additional compliance of AIM and will provide details soon.
If you would like to know more about AIM or would like to move to AIM-capable software, please read below or contact us to find out more.
From 1 April, 2018, there is a new way of paying provisional tax called the Accounting Income Method (AIM).
Before we look at the new method, it's worthwhile looking at the existing system.
Up until now, there have been two main methods of working out your provisional tax:
- Standard Method – this simply takes your tax liability from the previous year and adds 5% to it. There's no science to it and if your income fluctuates, either up or down, it can be inaccurate.
- Estimate Method – this is where you as the taxpayer can estimate your tax at a lower level. You would normally do this if you believe that the standard method would cause you to pay more provisional tax than you need to, for instance if your profit is likely to decrease over the year ahead. You have the option of using the estimate method once during the income year.
With either of these methods, you would typically pay provisional tax three times a year if you are registered for GST on a two-monthly basis. Some taxpayers have only two payments if they pay their GST every six months.
There is also the ratio method which for many reasons has proved unpopular.
AIM relies on you using computer software, such as Xero, MYOB or Reckon. In fact, you can only opt for AIM if you use these approved software products. There is no way to submit an AIM return in paper form or using a spreadsheet.
- turnover under $5M
- You use AIM-compatible software
- MYOB AccountRight Live
- MYOB Essentials
- Reckon – APS Software
What are the benefits?
AIM is certainly not going to suit every business. It's likely to appeal to a business whose income fluctuates or is in some way uncertain in the year ahead. If economic conditions deteriorate, Inland Revenue will refund overpaid provisional tax in much the same way as they do with GST when your expenses exceed your income.
There are a number of benefits but the main ones are:
- Your tax payments match your income – using AIM, your provisional tax is based on the income for the past two months. In any business you will likely have periods when your income in some months is lower than others.
- No Use of Money Interest – Inland Revenue charges Use-of-Money-Interest on tax that is underpaid when you use the Standard or Estimate method. So long as you have correctly applied the AIM, Inland Revenue will not charge interest if your provisional tax is too low.
- No surprises – when we do your accounts at the end of the year, there may be a small amount of terminal tax to pay, or a refund, but it's not likely to be very large as we have made most of the adjustments during the year.
The stated goal is to simplify the tax system but as you'll see below, that may not be the result.
Statement of Activity
The software produces what is called a "Statement of Activity" which is submitted to Inland Revenue electronically. This statement sets out your income for the year to date along with the expenses you have incurred. It also discloses the assets and liabilities in the business.
Can I go it alone or do I need an Accountant?
Setting up the system in the first place is critical.
Why? The AIM return has a lot of information in it that would usually be prepared by your accountant at the end of the financial year, such as:
- Depreciation on your fixed assets every time you file.
- Private expenses must be adjusted for at each installment date e.g. vehicle expenses and home office apportionment.
- Closing stock must be included. This means doing a physical stock take every couple of months or running a perpetual inventory system. If you opt for the latter, this may require investment in additional software.
- Accounts Payable and Accounts Receivable will need to be recorded if you are GST registered on an Invoice Basis.
- Non-deductible items must also be included.
As you can see, AIM could mean a lot of additional work and any discrepancies may have a pretty significant impact.
Do I need to use AIM?
No. The Standard and Estimate methods still remain so you can still opt for either of them. There have been some significant changes to the standard method which has made it more attractive.
To avoid possible penalties, we recommend you to contact us before opting into the AIM programme.