Taking AIM at provisional tax
By Greg Verhoef
From the 1st of April a new method for calculating provisional tax becomes available. The “Accounting Income Method” (AIM) is another proposal to simply business tax.
The existing regime of paying provisional tax based on the previous year’s profit, is based on the assumption profits steadily increase. In reality this is often not the case, taxable profits are far more volatile, markets change, overheads change, business structures are constantly changing not to mention the difficulty for start-ups or high growth businesses. I have spent many hours explaining the detail of the sometimes confusing provisional tax system, preparing estimates or arranging tax purchases to reduce interest and penalty charges for getting it wrong.
How AIM works: Provisional tax will be calculated every two months based on the profitability recorded in your accounting system. This has serval advantages; tax should more closely follow the business profits, in good periods tax will increase and in quite periods drop down, if a loss is made prior period provisional payments can be refunded quickly, 6 evenly spaced payments per year rather than 3 oddly timed lumpy payments should make cash flow management easier.
In Practice: Once your GST return is completed, your tax agent will be able prepare an AIM statement that calculates the year to date profit. The AIM statement allows for the tax agent to make adjustments for items not included in the system or usually made at year end. At year end the tax agent will still prepare a final set of Financial Statements and a tax return to wash up any items not picked up during the year. The IRD’s view is that you just need to take reasonable care as you go through the year.
Eligibility: The business turnover must to be less than $5m plus you and your tax agent must both use AIM-Capable software such as Xero. Unfortunately at this stage AIM is not available for partnerships, trusts, Maori authority, super funds and portfolio investment entities.
My Practice Philosophy: The AIM method fits well with the way I like to work with clients. I already use Xero with all my clients and currently check and file their GST returns. Not just to make sure they are correct but also to ‘keep my head in the game’. While preparing the AIM statements will require time the benefits of regular tax payments that align with the business performance should make paying the right amount of tax on time easier. And that’s got to be a good thing.