Accounting Income Method (AIM) for paying provisional tax
AIM is a new option for small businesses to pay their provisional taxes.
A new option for small businesses
AIM is a new option for small businesses to pay their provisional taxes. AIM enables provisional tax to be calculated through an IRD approved accounting software - MYOB, Xero or Reckon APS. AIM requires monthly or bi-monthly provisional tax payments, depending on whether a business is GST registered and, if so, how often GST returns are filed.
Some businesses are better suited
This new method may suit businesses that are new, or have irregular/seasonal income as it attempts to better match provisional tax payments with cashflow.
Alternatively, some businesses may simply wish to remove the guess work out of calculating provisional tax under the existing methods given that with AIM, accounting software performs the calculations.
Furthermore, users who pay their provisional tax instalments on time and in accordance with the amount calculated under the AIM method should not be exposed to use of money interest until their terminal tax date.
Criteria for using AIM
Generally, businesses can use the AIM method if they meet each of the criteria below:
They have elected to use this method before their first instalment date;
The business has $5m or less of annual gross income for the tax year, before the tax year in which they wish to use the AIM method;
The business uses IRD approved accounting software (MYOB, Xero or Reckon APS).
Businesses with an annual gross income of over $5 million may qualify to use the method if they acquire approval from the IRD.
Note that if a business meets any of the following criteria, they cannot use AIM:
They are excluded pursuant to a Determination issued by the Commissioner of Inland Revenue (CIR). This includes businesses operating as a partnership, Maori Authority, or trustees or beneficiaries of a trust;
The business has investments in a Foreign Investment Fund (FIF) or Controlled Foreign Company (CFC);
The business is in a transitional year (a year in which the balance date has been changed);
The business has previously been subject to shortfall penalties when using AIM;
The business has used AIM to inaccurately assess tax liabilities in the past;
The business has failed more than twice in the current tax year to provide the IRD with a Statement of Activity, which is due on or before each instalment date.
Using AIM to pay provisional tax
Any business wanting to use AIM to pay their provisional tax will need to be using one of the Inland Revenue approved accounting software providers: MYOB, Xero or APS Reckon. The software will use the relevant accounting information from the payment period to calculate the amount of tax to pay in accordance with AIM.
Once this amount has been calculated, the tax payment needs to be made directly to IRD. With MYOB, businesses can file the payment themselves or have an accountant file it on their behalf. With Xero and Reckon APS an accountant will need to file the payment.
At the end of the tax year, all businesses will still need to prepare and file an income tax return to determine its income tax liability for the year and ensure that the correct amount of income tax is ultimately paid to the IRD.
Businesses should note that if a payment is missed, the existing interest and penalty rules will apply to the underpaid amount.
An election to use AIM can be made by sending the IRD a copy of the Statement of Activity (through approved accounting software), before the first provisional tax due date.
For a simple overview of some of the taxes that apply to businesses in New Zealand, check out our article Tax made simple.
If your business is less than two years old, we can help you get started with an ANZ Business Start-up Package. You can receive 12 months' free MYOB Essentials or AccountRightdisclaimer - online accounting software to help make your day-to-day bookwork easier. Find out more here.