Managing provisional tax is one of the biggest challenges of running a small business. But now there’s a new way: AIM.
AIM (Accounting Income Method) is an initiative from Inland Revenue which allows you to work out your tax in real time. You fill out an AIM return form monthly or two monthly and pay tax based on your accounting profit. This means your payments are more relative to your earnings.
Here’s a breakdown of how AIM compares to other methods.
How will AIM work for you?
Provisional tax is a “pay as you earn” (PAYE) tax system for businesses and taxpayers with untaxed source income. Currently, small business owners can manage their provisional tax in four ways.
- Standard method – this is the default method and is based on last year +5% , and tax is paid 2 or 3 times a year
- Estimation method – estimate your tax and pay 2 or 3 times a year
- Ratio method – pay with your GST returns, based on a set ratio of the turnover in your GST returns
- AIM (Accounting Income Method – pay 6 or 12 times a year, based on the reported profit from your accounting system.
AIM is a new provisional tax method, and from 1 April 2019 businesses can opt into the AIM method at any time during the tax year if their annual revenue is less than $5m.
To use AIM you need AIM capable software such as MYOB, Reckon or Xero. You may also need to involve your accountant to file the Statement of Activity for you.
Q2’s strategic partner Tax Management NZ summarise the pros and cons of the Accounting Income Method as follows:
Advantages of AIM
- You will pay provisional at the same time as you earn your income. No profit made, no tax to pay. This will benefit those who earn their income at the tail-end of their year.
- No IRD interest charged if the tax paid under this method is less than actual income tax liability for the year. Any final balance will be due at your terminal tax date.
- Faster refunds of overpaid tax – no need to wait until the end of the year.
Disadvantages of AIM
- More frequent tax payments throughout the year. You will pay up to six times a year (or 12 times if you file GST returns monthly) compared to three times under the standard uplift or estimation methods.
- You won’t receive IRD credit interest if you overpay tax for the year.
- Greater compliance cost. You must file a statement of activity for each period tax is due, on top of an annual income tax return. Each statement of activity must include any tax adjustments normally made at year-end by your accountant. Put simply, it involves more work.
- You will pay tax based on accounting profit. This may not reflect your current cashflow position.
- AIM is highly reliant on the accuracy of the data you enter into your accounting software. As such, you may incur a shortfall penalty if you don’t take reasonable care when calculating payments.
- It won’t suit those who earn their income at the beginning of the year.
- Those operating as a partnership or trust cannot use AIM.
- Once you are in, you will not be able opt out of AIM until the start of a new income year.
- If you fall out of AIM, you will have to use the estimation method for the remainder of the year. IRD will treat you as if you were an estimation taxpayer from the beginning of your year. Interest will apply on any underpaid tax.
- You cannot use tax pooling. This is important because if you file your statement of activity, but don’t pay what’s due on time, you’ll be liable for IRD interest and late payment penalties.
New Businesses and AIM
It is one of the quirks of the NZ tax system that under the standard method new businesses do not pay any income tax in the first year of trading, and then two years of tax in year two. This means that new businesses have use of the extra cash and working capital to grow their business in the first two years. Under AIM new businesses will pay tax up to two years earlier than they would otherwise have to.
Smaller taxpayers and AIM
Also, if your annual tax bill is less than $60,000 and you pay your provisional tax using the standard uplift method then you will no longer be charged interest on underpaid provisional tax. This makes AIM less of an advantage for smaller taxpayers.
AIM will be useful for some businesses. Using AIM may be advantageous if your business is shrinking, your income is seasonal or irregular and occurs later in the tax year, or you find it hard to budget/save for tax.
Using AIM means you will be providing more detailed financial information, more regularly, to IRD.
Every business is different. Q2 strongly recommend that you discuss which provisional tax system best suits your business with your chartered accountant before deciding about AIM.
Looking for accounting advice to grow your business? At Q2 we take the hard work out of accounting. Speak to us today.