The Inland Revenue have a new income tax payment method for business owners who trade through either a company or sole-trader structure. Currently the method used is provisional tax – this is paid 3 times a year as well as terminal tax the following year for a “wash-up” of any tax over or under paid.
The new method is called the Accounting Income Method (AIM). The idea behind AIM is to make income tax payments based on actual profit and not historical tax data. AIM is another way of paying provisional tax, your payments would be more frequent (i.e. 6 times a year if you are registered for GST 2-monthly) but also smaller.
The IRD will refund income tax as you go if you have overpaid any, there will be no risk of being charged Use of Money Interest if you choose to pay your income tax through this method either.
This method is not available for those business owners who are:
6 monthly GST registered
Have a turnover over $5million
Do not have capable accounting software
Use tax pooling.
What you need to know…
Please see our points and considerations below to see if this method would suit your business structure and cashflow:
AIM can only be used if you are using capable software such as Xero, MYOB or Reckon.
If your business is using Xero, the AIM returns can only be filed through your Xero Advisor, this maybe us as your accountants or your bookkeeper. This means there will be an additional cost to prepare and file these AIM returns on your behalf.
MYOB have an option for you to file an AIM return alongside your GST return. Once you have processed your GST return, you will then need to make adjustments for Inventory or Stock, depreciation, shareholder salaries, non-deductible entertainment & private uses. All adjustments are to be consistent and either include or exclude Debtors and Creditors. We can also file your AIM return on your behalf using MYOB, although it is not necessary.
Once you elect to file an AIM return you are in the system you have to stay in the program for that financial year. The first AIM return due is alongside your monthly or two monthly GST return. So, this would be either April 2018 if you are monthly GST registered and April/May 2018 if you are two monthly GST. You cannot opt in or out during the financial year.
You will pay the income tax (Provisional tax) on the same day as your GST is due. If a refund is due – the IRD will then refund it out to you. You will only pay tax when you are making money.
Your software will then create a “Statement of Activity” to tell the IRD what has been happening over the last two months. It will then calculate the income tax due for the last two months.
At the end of the financial year, you will still need to file an income tax return per normal. This will include our year-end adjustments and a “wash-up” of the payments and actual tax due for the year. This will include tax payments made throughout the year which will need to be distributed to the shareholders if you are not a sole-trader.
What do we think….
This new method will certainly not suit everyone.
Our perception of this method is that for some business owners, paying GST and income tax every month or two monthly will be too much for cashflow.
We are also concerned at this early stage, the additional compliance cost of filing the AIM returns will also not be favoured especially when any errors made during the year by a client will take longer to correct at year end.
Please remember if you don’t like the idea of AIM that you are still able to use the Provisional tax method.
Please give us a call or drop us an email if you would like to consider using this new method for paying your income tax.
If you are not already on AIM capable software and you think you would like to use this method for filing your provisional tax, please also let us know so we can set you up on a capable software system.
We would also love any feedback on your thoughts, positive or negative about this new method.