Changes to the Provisional Tax System | Beany

Changes to the Provisional Tax System – Accounting Income Method

Business, Topical Tax Issues

From 1st April 2018, business owners will have the option to enter the AIM regime (accounting income method).  This is a new proposal from the IRD regarding the payment of provisional tax.

It is intended to spread payments of provisional tax over the course of the year.

Potentially, this could ease the  cash flow challenge that a single up-front lump sum presents for many small business owners.  

In theory, any business which uses approved software (for example, Xero) can pay their provisional tax at the same time as their GST, every two months.

There’s also a big apparent benefit for seasonal businesses. If you over-pay in one period due to good trading and then your turnover drops in the next, you can get a refund of the overpaid provisional tax, just like a GST refund.

At first glance it looks great, but after careful review, we think there are a few hooks in it, and so we are taking a wait and see approach.

Our professional body, Chartered Accountants of Australia and New Zealand, also think this might be the best approach.

As far as we can see, the hooks are as follows:

  • The provisional tax payable will be calculated on your business profit as per your accounting software.  This is rarely the same as your business profit for tax purposes at the end of the year.
  • To pay the correct amount of tax, you would need to do all your year-end adjustments every two months.  So in all probability you will be over-paying provisional tax.  This may not be an issue for you (and the IRD are fine with it!) but consider the impact of draining more cash out of your business than is required.
  • You can also potentially under-pay tax which may have more significant effects.  If you incorrectly claim any non-business expenses, you will under-pay tax and may be penalised at the year end with interest charges.
  • The IRD are flagging that any material mis-statement of provisional tax will be penalised at the year end and are insisting that your accountant files all AIM returns on your behalf to prevent a potential mis-statement.

The IRD are asking you to commit for one full income tax year to one method or the other, although you can change from year to year.

As with any new system, it’s often best to wait until any wrinkles are ironed out. Some of our clients will go with the AIM system, so we’ll be better placed to advise you after we have seen how it impacts them in a year or so.

Beany is launching a new product shortly so that any client who wishes to go into the AIM regime can do so.  Keep an eye out for the new product or call us for details.

Please feel free to contact us at support@beany.com with any queries regarding these changes and we will support anyone who wishes to move to the new system.

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