AIM - The proposed new way to pay provisional tax by Dale Adamson
26 May 2016
One of the proposals of the Governments Making Tax Simpler paper is the more timely payment of provisional tax for some taxpayers.
AIM, which stands for Accounting Income Method, is seen as a major component of this.
Provisional tax theory is that businesses should pay tax on income as they earn it, in a manner similar to PAYE on employee earnings. Under the current provisional tax regime, a taxpayer with residual income tax of $2500 is expected to have paid tax by instalments (normally 3) over the year the income is earned. This does not work out well for businesses with seasonal fluctuations or volatile incomes, who may end up having to source funds for tax payments in a period when they have minimal income.
AIM is the Government’s proposal that, a taxpayer’s accounting information for a period be used as a basis for calculating the businesses tax liability for that period. By the final provisional tax payment for the year, tax on the year’s profit will all have been paid. This will also help eliminate the “double whammy effect” of tax on a new business in its second year of operation.
Initially AIM, which is planned to commence 1 April 2018 if approved, will be available only to businesses with annual turnover of $5 million or less, and that have a good track record with the IRD. At this stage it appears that it will be an optional alternative to the current provisional tax system.
AIM may not suit businesses that:
- Do not have robust accounting systems.
- Have seasonal income concentrated at the beginning of the year.
- Have large amounts of overseas income resulting in large year end adjsutments.
- Have complex tax adjustments that require year end calculations.
As AIM is reliant on obtaining the business’s taxable operating profit for the period, it is more suited to users of computerised accounting packages The minimum requirement is likely to be maintenance of a double entry accounting system, be it software, spreadsheet or manual. However the added work involved may make it more cumbersome for those not on a tailored accounting software system.
Under AIM, the provisional tax periods will be monthly for those registered for monthly GST and two monthly for all other businesses. In each period, adjustments must be included for debtors & creditors, depreciation and apportionments that are normally made at year end. Shareholder employee salaries will only be able to be claimed as an expense if they are paid within the period. Any overpayment of tax by the business relating to shareholders’ salaries not claimed, will be available to transfer to meet their tax liability at year end.
The possibility that, due to income fluctuations and losses for a period, a business may have paid too much tax year to date (YTD), has been considered along with the possibility of refunding overpaid YTD tax or carrying it forward to a future period.
IRD will work with the major software providers, to ensure that the information required can be automatically calculated and sent to IRD each period. For others, a return similar to the current IR10 year end summary of income & expenses, assets & liabilities etc will be required to be filed for each period. This could become time consuming if not automated.
One of the major advantages of the system is that the business will have up to date accounting records, and control of their tax liabilities. The reports produced by these systems will provide far greater management tools than the historical year end accounts.
PKF Francis Aickin regard AIM as an opportunity for businesses and their advisors to work closely together for the optimisation of the business using real time data. Part of this is the use of cloud computer systems, such as Xero, whereby the business can provide their adviser with access to overview, assist and advise on the business and its reporting.
More information on AIM proposal can be found through the links on our website: www.pkffa.co.nz