Run test scenarios to see if IRD’s changes work for you
In simple terms, IRD’s latest enhancement, AIM (the Accounting Income Method for paying provisional tax), is a system where provisional tax for the year is paid more frequently.
For monthly GST-registered taxpayers there are 12 monthly payments. All others, including two- or six-monthly GSTregistered or non-registered, have two-monthly payments.
This doesn’t replace the existing options; it is available alongside them. The instalment amount is based on tax payable on the year to date taxable profit less previous instalments paid. This may result in tax to pay or a refund.
AIM means that provisional tax may be paid earlier than otherwise. However, for some it may delay payment, particularly businesses that earn more in the later part of the tax year, as they would pay smaller instalments initially, with larger ones later in the year. This contrasts with the traditional equal instalments, and may suit businesses with cyclical variances in taxable profit from year to year.
The amount to be paid is advised to IRD by completion of a statement of activity, similar to the IR10 financial statements summary that is filed with the annual income tax return. This means that IRD will be getting better information on the trading trends of small businesses, and therefore better data for comparison purposes.
At this stage, the statement of activity can only be created by approved software programmes. Those currently approved for taxpayers’ use are MYOB AccountRight Live and MYOB Essentials Accounting. Tax agents are able to use Xero and Reckon-APS as well.
Not all taxpayers are eligible to use AIM. The main exclusions are partnerships, trustees and beneficiaries of trusts, taxpayers with foreign investment funds or where turnover exceeds $5 million
AIM-capable accounting software also includes adjustments for depreciation and private use expenditure. Debtors and creditors must be included if GST is on an invoice basis, otherwise their inclusion is optional. The options for trading stock include use of perpetual inventory, input of a manual stock take figure or constant at last year’s figure.
Livestock is not classed as trading stock, and there are special rules for companies where shareholder salaries are paid.
AIM also takes into account tax losses carried forward from prior years, but only once that year has been assessed. Thus, for the first few instalment dates of the new year, payments will be overcalculated.
An error or oversight affecting the year to date calculation in one period must be corrected in the next period after the error or omission is identified.
The AIM method can be used for the 2018-19 tax year onwards, but taxpayers can only opt into the AIM method from the beginning of their tax year. A new business can opt in from commencement, and all can swap between methods from year to year.
AIM is not straightforward. Nor is it easily established whether a particular taxpayer will be advantaged or disadvantaged by adopting it. Any taxpayer considering using it will need their accountant to run test scenarios to establish how it will work for them.