Changes to Provisional Tax part 2

We’ve blogged on this before: now we have more detail, we’d like to share with you our analysis of how it will work in practice.

The AIM system comes into effect on April 1st 2018 and if you want to use it, you must register no later than the filing date of your first GST return of the new year. Once in, you must stay in for a full tax year. But it is important to stress at this stage that the new system is not compulsory – yet.

In principle, the intentions of the new proposal are great – to reduce the size of each tax payment and ease cash flow stress on SMEs and so we support the theory of it.  You pay your provisional tax as you go, with your GST payments, and if you over-pay, you can get a refund in the next period.

There are some rules about who can use it:

  •      Businesses with a turnover of under $5 million
  •      NOT partnerships and trusts
  •      You do not need to be GST registered
  •      Returns can only be monthly or two monthly (not 6 monthly)

OK, that’s the easy bit.  Then it gets a bit more complicated!

The IRD state that you must take ‘reasonable care’ to avoid penalties and interest.  To ensure that you do, they (and Xero) have decided that returns can only be filed through an accountant’s software.  Unlike your GST returns, you cannot file straight from your Xero file. This may change in the future but Xero and the IRD do understand that this is new territory for everyone and they have decided that having the support of your accountant may be a good thing.

So why would they think that?  Well, they have run through a list of the 8 adjustments that we may need to make to ensure that the information is a good approximation of your position.

The first step is a reconciled file – that should be straightforward.  Next are the adjustments which should only be necessary if you are running a cash book Xero file (or not maintaining this part of your business file):

  1. Inventory
  2. Debtors
  3. Creditors

If you are running a cash book file, you may wish to upgrade so that this can be done easily.

Next are some of the more complex adjustments that we would routinely make at the year-end but will now need to be done (according to the IRD) every return period:

  1. Provisions – not allowed so need to be adjusted for if in the client file
  2. Private Use adjustments
  3. Losses – comes through from IRD
  4. Custom – eg use of home
  5. Shareholder salaries

It is the last one which will take some thought, as we need to ensure you are not over-paying tax.  If everything is left in the company, you will be paying provisional tax at 28% whereas your personal rate could be lower.  Ideally we would also check each period what other income you have so we don’t allocate profit to you and then find your rate was actually higher than the company!

As a result of the complexity (and uncertainty), our professional association (Chartered Accountants of Australia and New Zealand) is advising people to wait a year.  However we are happy to work through this with any client who wants to dive straight in.

We are estimating that the 6 returns  will take an extra 9 hours in total each year, in order to properly manage this for our clients. We are putting together an add-on package which we have discounted down to $1,200 plus GST per annum.  This price will be reviewed after 6 months to make sure it is working fairly for all concerned.

If you are on monthly GST returns, your last date to decide about AIM is 28th May 2018 and if you are on two monthly returns, your last date is 28th June 2018.

Like all new systems, it does appear complicated at first, so we are here to help if you need further clarification.

Please contact us on 0800 755 333 for details on how to sign up and get going with this, or for more information.