From 1 April 2018 taxpayers will have a new optional method for paying provisional tax – the Accounting Income Method (AIM).

Why the need for AIM?

AIM is an IRD initiative to make provisional tax simpler and more accurate.
Currently, most businesses pay provisional tax in three instalments, spread evenly over the income year. These payments are typically based on the previous years’ tax liability uplifted by a percentage or based on an estimate. If a payment is missed, or not enough tax is paid to cover the final tax liability, taxpayers will be subject to IRD interest and possible penalties. 

The disadvantages of the current methods are:

  • Businesses with irregular or seasonal income are still expected to pay provisional tax at each of the three instalments which can strain cash flow;

  • Businesses whose profitability may vary year-to-year may struggle to estimate accurately their current year’s tax liability;

  • Many new businesses do not pay provisional tax in their first year as they are not required to (although they will still be charged IRD interest). This can come back to bite them in the second year when they will effectively have to pay two years’ tax liability in a one-year period. 

How AIM works

AIM is a method that may be beneficial to businesses that are new or growing, have irregular/seasonal income, or who find it hard to forecast income accurately.

AIM will enable taxpayers with enabled, IRD compliant accounting software (such as Xero), to pay provisional tax based on their year-to-date accounting income information. So, taxpayers will only pay tax if the business is making a profit. A statement will be submitted directly from taxpayers’ accounting software to IRD.

Taxpayers will pay provisional tax either monthly or two-monthly depending in their GST periods. Taxpayers that are not GST registered and elect to use AIM will pay provisional tax on a two-monthly basis. 

Taxpayers that have paid too much tax in an earlier period(s) based on their most recent period calculation can get that tax refunded – the IRD indicating that it will provide a refund within two days. 

Further, businesses using AIM will not be charged IRD interest unless the business has failed to pay the instalments due. 

Broadly, AIM will be available to taxpayers who have annual gross income of $5m or less (with some exceptions) and who are not trusts or partnerships (the IRD is working on including these entities in future). 

If you want more information, please contact Grant Neagle (grant@inghammora.co.nz or by phone 07 927 1225).