Are you a Sole Trader or owner of a Company with income under $5 million?
Read here about the new Provisional Tax Payment scheme coming
It’s called the ‘Accounting Income Method’, or AIM in short. The new provisional Tax Payment option is being introduced by Inland Revenue to begin next year on 1st April 2018. It involves making more regular tax payments throughout the year, with the tax payments aligned to reflect the profitability of the business between set dates. One feature of this new scheme is having no provisional tax bill to pay if there was no profit over an assessed period.
How does this new provisional tax option work?
First, to use this new tax payment option, businesses need to be using AIM enabled approved accounting software. Currently Xero, MYOB or Reckon are approved providers. Secondly, opting in into the scheme must be done at the beginning of each financial year. New businesses starting up can opt-in anytime from the first day of trading.
The AIM accounting software will evaluate your coded transactions every two months (or month). Screen prompts will check for any accounting adjustments needed, like the removal of private transactions, trading stock adjustments and then a ‘Statement of Activity’ report is generated.
The report will show any calculated provisional tax payable. You can review this Activity report, make corrections where necessary, or your Accountant or Bookkeeper can do this for you. Then you or your tax agent will submit this Activity report to Inland Revenue electronically. Any provisional taxes payable need to be paid by the 28th of the month following each return. Refunds can be generated early too, based on tax payments made, if the business is incurring losses.
GST Registered businesses will note the AIM process has a similar concept to the current GST reporting process. Should they opt-in, the AIM scheme will run parallel over the same time frames as their GST periods. Both GST six-monthly and non-registered businesses wanting to opt-in will likely to be allocated two monthly reporting periods.
Advantages for some businesses – smoothing out cash-flows…
- For seasonal businesses or those facing uncertain markets. Means only paying taxes when profits are being earnt.
- An ‘orderly’ option of squaring away tax bills alongside other trading bills throughout the year. Keeping both bookkeeping records and tax payments up to date.
- Having six or twelve lower tax payments spread through the year may help with better cash flow management. Especially for those businesses with lean cash reserves.
- Appeal as the fairer option to taxpayers, with paying taxes based on real-time business activities happening, rather than pre-calculated figures based on the prior year. Those spare cash reserves get directed to other business needs at the time instead of awaiting tax assessment at year end and getting a refund.
- Done correctly, will be little or no terminal tax bills to pay at year end. IRD expects this process will help minimise issues of UOMI fees and penalty costs for short paid taxes. (UOMI = Use of Money Interest).
Growing Businesses approaching that $2500.00 tax threshold for fixed Provisional payments
A big plus is avoiding that ‘double whammy’ tax issue that arises at the $2500 tax payable threshold. This is when businesses must begin paying provisional tax in instalments for the current tax year, as well as settling taxes for the previous financial year. Having high tax bills over this time presents a real challenge for growing businesses with lean cash reserves. If you have a growing business not quite at that tax threshold door yet – this AIM scheme may be an excellent tax payment option to take.
Keeping the Books and Records updated while using AIM will be a must:
Having the accounts updated and correctly recording information will be essential. If you are late, Inland Revenue will apply late filing or late payment penalties on this scheme, as they do with other tax return processing. Annual Tax Returns will still need to be filed, after year end. (The AIM Statements are not tax returns, it is more a reporting process to the IRD). Any short-paid taxes after year-end are still liable for penalties or UOMI fees.
Will it suit my Business?
There are definite benefits in this AIM provisional tax process for some businesses. Because each business is different with management processes and trading activities, we advise discussing this new tax payment option with your Accountant or Bookkeeper. Should you proceed, you will need to ensure both your accounting software and business accounts are correctly set up. (Not using AIM accounting software now? See our great offer below!).
Some businesses are able to budget and meet current provisional tax payments as needed. So there may be no real advantage for them to switch to this new tax payment scheme. If your business financials requires a high number of accounting adjustments at year-end, AIM may not be suitable. Still, if you are a new or growing business, this tax scheme could be a good option. As suggested, it’s really best if you talk to your Accountant or Bookkeeper. If you do not have one – we would be happy to provide our expertise and services to help you decide.
Do The Sums Bookkeeping and More has been receiving educational updates from Inland Revenue about this new tax payment process. This is a general blog covering the topic, and we will be publishing another blog early in the New Year with more detailed information about this new scheme, as well as posting updates on our Facebook page. You can scroll down and register for newsletters on this page: Newsletter sign-up.
Have you heard about our great Xero offer!
Been considering switching to an online accounting software system lately? Why not get Xero set up for your business and receive a hours free training with us, for just $150.00? From our reviews, you’ll find business owners do find ease in having their Xero accounts set up properly and personalised to suit the needs of their businesses. Xero really does help to make the bookkeeping tasks easy. Tell us about your business, and we’ll tell you how Xero can help your business. No hard sell, we promise.
Secondly, after the Xero set up … should you engage our services with either regular processing or accounting work – you get to have the cost of $150.00 credited off your first account from us! Call us today on 027 379 0992 to chat, or you can book a time here. Time to make ‘doing the books’ an easy experience for you!
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