Accounting Income Method (AIM) for Provisional Tax – what you need to know
5th October, 2017
Calculating and paying provisional tax is one of the most difficult areas of compliance. Which is why Inland revenue has taken ‘aim’ at provisional tax.
What is AIM?
The Accounting Income Method (AIM) is a new option for small businesses to calculate provisional tax through their accounting software.
AIM is a new option in addition to the existing three options (standard, estimation and ratio). It is available from 1 April 2018.
It’s a pay-as-you-go choice for businesses with turnover under $5 million a year, and will suit businesses wanting to keep up-to-date and on top of their tax obligations.
Small businesses choosing AIM will pay provisional tax in line with their cashflow. This will help businesses make sure they don’t pay more tax than they need to throughout the year.
Why is there a new option?
AIM will be simple and easy to use.
The business’ accounting software will work out how much provisional tax you need to pay each instalment based on their past two months of income instead of the previous year, meaning greater accuracy.
The amount you pay will be in line with the amount you earn, so it will be particularly beneficial for those businesses that have fluctuating income.
You’ll also be able to submit it directly from your accounting software.
How often will you pay?
Businesses using AIM will make provisional tax payments more often.
Those not registered for GST or paying GST every two or six months will pay provisional tax every two months. Provisional tax payments will be due monthly for businesses paying GST monthly.
Use of money interest
A business using AIM to calculate and pay provisional tax will not be charged use of money interest unless the business has failed to pay the instalments as calculated under AIM.
It is expected that businesses who use AIM will either no longer have terminal tax liabilities (on the basis that their tax payments will be made in near real-time, and based on actual results), or there will be a small difference between their provisional tax payments and their final liability.
Benefits for small business
AIM will be great for start-ups because they only pay tax on results they have achieved. AIM should also work well for businesses that are seasonal or have fluctuating income because the payment of taxes adjusts with how much revenue you earn.
AIM will also be responsive to changing business conditions.
If economic conditions tighten and a business’ tax liability drops, Inland Revenue will refund overpayments, in much the same way that GST refunds are handled.
With the advent of cloud accounting solutions like those available from MYOB, financial information is up-to-date and at your fingertips.
AIM uses that power to enable the calculation of provisional tax from a business’s latest available financial information.