Why IRD Are Promoting Their New Provisional Tax Method?
IRD are enthusiastically promoting their new provisional tax method to small businesses. Below is one suggestion as to why.
What is AIM?
For some time, there have been three options for calculating provisional tax with the standard method – adding 5% to the previous year’s tax and paying in two or three instalments during the year – being the default option for small business. The other two options are estimating and the ratio method – calculating provisional tax as a percentage of sales in each GST return. From 1 April 2018, IRD have added a fourth option – the Accounting Income Method or AIM.
Under AIM, you send management accounts direct from your accounting software to IRD every two months and pay provisional tax based on the profit in those accounts.
Promoted Benefits of AIM
The main benefit of AIM advanced by IRD is that your provisional tax is based on your actual profit meaning you pay more tax when business is good and less when business drops off. Your tax paid by year-end should be accurate with no significant end-of-year catch-up required. If this a significant advantage to you, AIM may be your option. However, the ratio method, where you pay provisional tax based on the turnover in each GST return, also matches provisional tax to business activity.
Another benefit put forward by IRD is that AIM stops potential Use of Money Interest. If you have been subject to IRD’s retrospective interest charges on underpaid provisional tax, where they assume you should have know what your final tax bill would be way back from the first provisional tax date 1/3 of the way through the year, this may be a tempting advantage. However, other changes to the provisional tax rules, also brought in from 1 April 2018, basically wipe out these interest charges for nearly all small business anyway.
IRD Are Taking AIM
Perhaps IRD’s biggest incentive is having direct access to your current accounting information. AIM requires the business to make adjustments that are usually only made at year-end and lay all their cards out during the year. You may or may not be comfortable doing that. But with IRD investing heavily in their new systems which are greatly increasing their ability to analyse data and target non-compliance, this access to your business information is gold.
If you think AIM may be a good option for you, give us a call to discuss.
Alternatively, read IRD’s take on AIM or this article by Tax Management New Zealand with a contrary view.