Understanding the Accounting Income Method (AIM) for Provisional Tax in New Zealand

If you run a small business in New Zealand, provisional tax can often cause a bit of a cashflow crunch if your income is seasonal or fluctuates year to year or even quarter to quarter. The standard method of calculation relies on last year’s numbers, leaving you vulnerable to paying tax on money you might not have earned yet in the current year.

With the Accounting Income Method (AIM), the calculation takes a different approach. It’s more of a pay-as-you-go system that calculates provisional tax based on actual income. Introduced by Inland Revenue in 2018, AIM was designed to help businesses with variable or unpredictable income manage provisional tax in a way that actually reflects what they’re earning.

Under AIM, provisional tax is calculated based on your income from real-time accounting data, reported at regular intervals through a statement of activity. Rather than paying a set amount based on last year's tax, you file statements showing your income as the year progresses. Inland Revenue then determines whether you need to make a payment based on what you've actually earned.

The key difference from other methods is that you only pay provisional tax when your business makes a profit. If you have a period where income is low or you make a loss, you won't owe provisional tax for that period.

AIM can be used by individuals and companies with an annual turnover under $5 million and who use AIM-compatible accounting software (e.g. Xero).

It works well where:

The standard method applies a set percentage (5%) to your prior year’s income tax. Essentially, it assumes that your income will be that percentage higher year-on-year. For example, if your tax bill last year was $20,000 then your provisional tax for the current year will be $21,000 (split across 2 or 3 instalments). It’s much simpler to calculate and works well if your income is relatively stable across the year.

On the other hand, AIM requires regular reporting of actual income so that provisional tax is adjusted based on real figures. This means more active involvement, but pays off if your circumstances don’t fit the standard method. For example, if you have a business where 80% of income is earned across a 3-month peak season.

Imagine you run a tourism business with seasonal patterns. Summer months are busy, but winter slows down considerably.

With AIM, you'd file a statement of activity monthly or every two months (depending on your GST registration). In a busy month when you've earned $15,000 in income, your accountant calculates the provisional tax due on that month's profit and you pay it. In a quieter month when income drops to $5,000, your provisional tax payment is proportionally lower. If a particular month shows a loss, you don't pay any provisional tax for that period.

This means your provisional tax payments actually match your cashflow. You're not paying large lump sums based on annual estimates, then waiting until year-end to find out whether you've overpaid or underpaid.

When you use AIM, you must file a statement of activity with Inland Revenue through your accounting software. The frequency depends on your GST frequency.

Each statement informs the IRD of your actual income for that period and is used to determine the provisional tax amount.

It's worth noting that AIM users are automatically switched to the standard provisional tax method at the beginning of each financial year. If you want to continue using AIM, you simply file your first statement of activity for the new year, and Inland Revenue will automatically update your account.

For detailed information on provisional tax deadlines, due dates and the broader provisional tax system, refer to our guide to provisional tax.

If you're a Beany client, AIM calculations and reporting is available as part of our full accounting service. We can manage the regular statements of activity and ensure you're paying the right amount at the right times. If you're wondering whether AIM is right for your business or want to explore how it would work with your specific circumstances, we can talk through your situation and help you make the decision that suits your cashflow and business model.