An additional option for calculating provisional tax known as AIM (Accounting Income Method) is now available for small businesses that use approved software to prepare their accounts with effect from 1 April 2018.
This guide will give you some idea of whether you are eligible and whether you wish to use this method.
(1) If you are a large or medium business reading this, take note that Inland Revenue very much see this roll out to small businesses as a pilot, with the intention that it will be offered to larger businesses down the track.
(2) The following software providers have the functionality to calculate AIM:
a. MYOB – both Accountright Live and Essentials Accounting
b. Reckon – APS software
c. Xero – through Tax Practice Manager (used by Accountants and some bookkeepers).
(3) In some instances the requirements imposed by the tax adjustment determinations may be too prohibitive to be worth the trouble.
a. You cannot group tax losses.
b. Tax depreciation must be maintained and up to date.
c. Trading Stock and Livestock need to be accurate.
d. Private expenditure must be split out correctly.
e. Shareholder salary adjustments (where shareholders are not paid through the payroll with PAYE).
Not all tax adjustments that you will ultimately make in a tax return are mandatory which may result in a residual tax payment at year end. For example home office and entertainment adjustments.
If these adjustments are not set up properly it can result in additional compliance in making manual adjustments on each instalment.
Taxpayers must still take reasonable care when calculating tax liabilities under this method and could still be exposed to penalties for not doing so.
(4) The taxpayer is supplying Inland Revenue with a mini set of financial statements each instalment period and therefore far more information about their business and activity than is currently the situation. It is possible that Inland Revenue could run data analysis on such data submitted down the track if they wish to.
- If you use the AIM method you are prevented from using tax pooling for provisional tax and to manage cash flow.
- Changes to the rules mean that companies are no longer charged use of money interest if they use the safe harbour method (paying based on last year) unless their income tax is over $60,000.
- If during the year you overpay your provisional tax you can get a refund, so the calculation is basically cumulative.
- Although you are submitting this information on a regular basis, you are still required to submit accurate tax returns and other financial information at year end.