Choose the provisional tax option that’s right for you

Inland Revenue’s Greg James: choose the provisional tax option that’s right for your business

21 MAY 2018

Following the introduction of the new accounting income method (AIM) there are now four options for managing provisional tax, so small businesses can use the one best suited to their particular needs.

AIM is available to businesses with annual turnover under $5 million, using accounting software, and allows the user to pay provisional tax only when the company is making a profit.

It joins the three existing options:

• the traditional provisional tax product, known as standard uplift, where three payments are made each year based on your tax bill in the year previous plus 5%;
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• the GST ratio method, where provisional tax is calculated based on your GST supplies and is all paid along with your GST;
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• the estimate method, based on an estimate of likely earnings for the year.
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These options are supported by a recent relaxing of rules meaning that fewer taxpayers need to make interest payments to Inland Revenue. AIM offers users even less exposure to the use-of-money-interest system as long as payments are made in full and on time.

The big difference with AIM is that the calculations are made by your business software, which both builds tax obligations into your usual business processes and means there’s less chance of over- or under-paying and falling into the interest system.

A further advantage is that if your business makes a loss you can get a refund of overpaid tax straight away rather than waiting until the end of the year.

Inland Revenue Deputy Commissioner Greg James

AIM software providers tell us it should take an average business or tax agent around 30 minutes to set up the AIM software for their business and around five minutes for every two-monthly filing.

The beauty of AIM is that all the complexity of provisional tax is taken care of by the software so if you are a business that keeps good records during the year and has robust accounting practices, then AIM is no additional work.

We know that AIM won’t work for every small business and that’s why we have three other provisional tax options that we continually try to improve.

We are expecting uptake of AIM to grow steadily as the accounting industry adapts to new ways of working, the usage of accounting software grows in small businesses and the number of software providers offering it increases.

Easing the burden

Deciding which one to choose is a call for each business and its advisors to make but we are confident that AIM will be a great way to reduce compliance costs, particularly for businesses starting up, growing fast, or with irregular or seasonal income.

A business’s time burden should lessen year after year as the software improves and becomes more aligned with how you do business.

AIM requires a little set-up time before the first payment in order to plan for adjustments like depreciation and private expenditure but the resulting calculations are made by the software.

Subsequent filings are much quicker and easier since the software saves the previous adjustment settings. Each filing sends the company’s statement of activity to Inland Revenue but there’s still an end of year assessment to finally determine if the right amount of tax has been paid.

Customers have told us they’re worried about being caught out by data entry errors but the software allows plenty of opportunity to catch and correct those. Any mistakes that still manage to slip through are likely to be picked up in the end-of-year tax return process.

Adapting to new ways of working

We are seeing rapid change in the accounting industry driven by increasing use of technology. Alongside this, we see a demand from customers for real time financial information on how a business is tracking.

AIM is a product designed to meet that demand and respond to the new ways accountants are working.

There’s steady growth in the accounting software market as more accountants change their business practices and as the software continues to develop more functionality to meet the needs of a wider range of customers. We think the number of our customers preferring to file their tax directly from their software will only increase.

Our business transformation programme is about making all interactions with the tax system simpler and easier. We want all customers to be able to pay tax in a manner and format that works best in their life and their business.

Now is the time for businesses to see if AIM is the best provisional tax option for them. Existing businesses will need to opt in at the start of the tax year. For many, this will mean filing their first AIM payment and statement of activity at the end of June. New businesses can start using AIM as soon as they get up and running.

Find out more at www.ird.govt.nz/AIM

Greg James is a deputy commissioner at Inland Revenue in charge of transformation

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