AIM - an alternative provisional tax option for businesses

Designed for businesses that have turnover of less than $5 million a year, they can work out their provisional tax using the accounting income method (AIM).

What's on this page

·         How AIM works

·         Finding a provider of AIM-capable software

·         Your statement of activity

·         How AIM-capable software will work out your AIM payments

·         Making provisional payments using AIM

·         How AIM compares to other provisional tax methods

How AIM works

AIM uses functionality included in approved accounting software to work out payments. You can continue to use another provisional tax option if you think your business will not suit AIM. It will suit your business if:

·         your business is growing

·         you're new to business

·         you have irregular or seasonal income

·         it's hard to forecast your income accurately, or

·         you have accounting software or want to start using accounting software.

You can join AIM at any time during the y

ear from April 2019.

Once you've chosen AIM you'll only pay provisional tax when your business makes a profit. This helps you avoid cash flow problems.

As long as you make your payments in full and on time, there is no exposure to use-of-money interest. If your business makes a loss you can get your refund straightaway rather than waiting until the end of the year.

Start-up and ongoing costs to businesses

We worked to make sure AIM does not increase ongoing compliance costs and is simple for you to use during the year. AIM will help you spend more time on your business instead of worrying about tax bills.

What's new

·         you can join AIM at any time during the year from April 2019

·         two ways to treat profits paid to shareholder- employees when your business is using AIM

·         the ability to remove due date notifications for AIM shareholders

·         penalty and interest information is provided throughout the year, so no surprises, and

·         you can now use the GAP method for paying AIM provisional tax payments.

Two options for paying out the profits of an AIM company to its shareholding employees.

Option 1: No payments made to shareholder-employees throughout the year.

When an AIM company does not pay a regular salary to its shareholding employee during the year, this is likely to lead to the company overpaying provisional tax throughout the year.

These overpayments can be used to cover the income tax for the shareholding employee when their salary is paid at the end of the year.

Option 2: Regular salary payments are made throughout the year.

Each AIM payment would reflect the portion of shareholder salary that was paid during the period.

The company pays the tax on behalf of the shareholder using their marginal tax rate.

Any tax paid in the end of year wash up could be used to cover any remaining income tax liability the shareholding employee has as an agent of the AIM company.

If you're already using AIM, there's no need to opt in each year, continue to submit your statement of activity and pay when it's due.

You do not need to enrol or register to use AIM. On your first due date send us your statement of activity through your software and we'll know you've chosen to use AIM for the 2020 income year. You'll also need to send your payment if there is one to make.

Your statement of activity

On each AIM due date, your software will work out if you have a payment to make. It will collate the information to show us how it came to this amount - this is your statement of activity.

It is not an income tax return and is not processed as one. This means if you make a mistake you can simply fix it in the next statement.

What happens if a statement of activity is not filed

If a statement of activity is filed but payment is not made, penalties and interest will apply to the underpayment. These will continue to apply until you make payment.

You cannot miss filing more than two statements of activity. If you do, you will no longer be able to use AIM and we'll treat you as using the estimation option. The estimation option will apply as if you have been in it for the whole year. This will result in exposure to use-of-money interest. It will not be automatic - we'll talk with you first to make sure there has not been a misunderstanding or system error.

How AIM-capable software will work out your AIM payments

AIM-capable accounting software has the functionality to work out if it needs to include adjustments, for example:

·         Your depreciation register
Is it up to date and does it use our depreciation rates?

·         Private use expenditure
Has it been removed from accounting income?

·         Debtors and creditors
Optional, unless you include them for your GST calculation.

·         Trading stock
Included where you have a perpetual inventory system or:

·         it can be manually included, or

·         you can use last year's figure.

·         Prior year losses
If we've already assessed these, you can include them to reduce your payments.

·         Provisions
Shareholder salaries.

Find out more about these adjustments in the Tax Information Bulletin Volume 29, No 10

The profit remaining is used by your software to work out your provisional tax payment based on your:

·         company rate, or

·         individual rate.

If there's no profit you will not need to make a provisional tax payment.

 

Making provisional tax payments using AIM

Your AIM software will work out your provisional tax payments and let you know how much to pay. Your due dates for AIM are generally the same as your GST due dates:

·         monthly (if you're registered for monthly filing), or

·         two-monthly (if you're registered for two or six-monthly filing).

If you're not registered for GST, your dates would be the two-monthly GST due dates that align to your balance date. If you have a non-standard balance date, check with your software provider when you'll be able to start using AIM.

Provisional tax payment refunds

If you have a drop in profit that means you have overpaid you can get a refund through your statement of activity. You do not need to contact us or file any other documents. These refunds will help with cash flow if your profit drops due to seasonality impacts or an adverse event.

You can ask us in your statement of activity to:

·         release a partial or full refund

·         hold your refund, or

·         transfer to another tax type or customer.

How AIM compares to other provisional tax methods

Below are 3 different scenarios for businesses with less than $5 million turnover per year. In these scenarios we compare AIM to the standard, ratio and estimation methods for paying provisional tax. These scenarios look at types of businesses that could most benefit from AIM because they are:

·         new or growing

·         earning irregular or seasonal income, or

·         unable to accurately forecast their income.

standard versus aim when paying provisional tax banner

Scenario: Lydia is an avocado farmer and earns her profit between September and April.

How she pays provisional tax: Lydia uses the standard provisional tax method because her profits usually increase year to year. Based on last year's end-of-year tax assessment, she needs to pay $120,000 for her provisional tax this year. She makes a $40,000 payment in August, January and May. The August payment is difficult for Lydia because she makes most of her money between September and April.

How Lydia's year shapes up using standard method

How Lydia could benefit from AIM: Lydia would pay her provisional tax based on the money she made throughout the year. Lydia's software would calculate smaller, more frequent payments. These would align with her cash flow when she submits her monthly statement of activity. Since her income fluctuates, she could request a refund for overpaid tax in the current year instead of waiting until year end. AIM is the only provisional tax method that allows this.

How Lydia's year shapes up using AIM

Conclusion: Lydia finds it easier to manage her provisional tax payments using AIM and now has more time for maintaining her avocado farm during the busy season.

ratio versus AIM provisional tax banner

Scenario: John is a commercial fisher and owns his own boat. He can claim his boat as a depreciable asset, which will reduce his income tax.

How he pays provisional tax: He uses the ratio method to calculate provisional tax because his income fluctuates. His provisional tax lines up with his two-monthly GST returns. He pays 6 provisional tax payments during the year, based on his GST taxable supplies, totalling $59,800. He includes his depreciation expense in his end-of-year tax return which results in an assessment of $47,800. As it turns out, he gets a refund of $12,000 for overpaid tax.

timeline showing payments using ratio method

How John could benefit from AIM: Instead of waiting until year end, John would include his boat's depreciation expense when submitting his statement of activity every 2 months. He would end up paying less money when he made a profit and get money back on months he did not.

How John's year shapes up using AIM

Conclusion: John does not need to wait to receive his refund, making his cash flow easier to manage. When he files his end-of-year tax return there is no refund or further tax to pay because he already accounted for his income and expenses using AIM.

estimation versus AIM provisional tax methods banner

Scenario: Hemi and Aroha run a small film production company and their income changes a lot based on contracts they win for jobs.

How they pay provisional tax: Hemi and Aroha are unsure how much they'll make each year, so they use the estimation method. They estimate that they'll owe $30,000. They make their first $10,000 payment in August.

Over Christmas they win a new film contract. Hemi contacts IRD in January to increase their estimate to $60,000 based on the extra income. They make their next 2 payments of $25,000 in January and May based on the new estimation.

When they file their end-of-year tax return, they get a $57,000 tax assessment. Since they made their payments on time, they do not receive any penalties. But, interest is calculated on the difference between $19,000 (one third of the assessment) and the tax paid on each date.

How hemi and aroha's year shapes up using estimation method

How they could benefit from AIM: Hemi and Aroha would send us a statement of activity every month when they file their GST. They would only need to make provisional tax payments in June, December and January, when they made their profit. Their software would work out that nothing was due to be paid on the months that they did not earn an income.

How hemi and aroha's year shapes up using AIM

Conclusion: Hemi and Aroha will not need to re-estimate their provisional tax if they earn more income. Also, they will not be charged interest due to underestimations if they pay what their software tells them to, in full and on time. They're less stressed and have more time to focus on growing their business.