- Inland Revenue introduced the accounting income method (AIM) in 2018.
- AIM accesses real-time account information to determine a business’s real-time tax liability either once a month or every two months.
- AIM is available to businesses with an annual turnover of less than NZ$5 million.
Imagine being able to tell a client who has gone through a long quiet patch that they don’t have to pay a provisional tax bill this month. Or being able to tell them at the end of the year that there’s no more tax to pay.
These are the sorts of reassuring messages tax professionals in New Zealand have been able to give their clients using the accounting income method (AIM), Inland Revenue’s new provisional tax option.
AIM has been in existence for well over a year and is available to businesses with an annual turnover of less than NZ$5 million. About 2000 customers are using it but it’s still early days. We knew small businesses wouldn’t flock to it straight away and we understand why many have preferred to wait and see how it performs before making the switch.
Now, however, we can offer a progress report and reveal that AIM is performing even better than we expected. Customers tell us it is taking the stress out of provisional tax, providing much more certainty and giving them a great overview of how their business is tracking.
It’s a good time to decide whether AIM will help your clients.
Pay only when there’s a profit
Provisional tax can be tricky but AIM is relatively straightforward. Here’s how it works: three software providers (MYOB, Reckon APS and Xero) can supply AIM-capable accounting software through their platforms. AIM accesses real-time account information via the platform and helps determine a business’s real-time tax liability.
Each month or every two months (depending on when a business pays GST), the software will calculate if there’s a payment due and provide a report to show how it reached that conclusion. This is a statement of activity, which gets filed to Inland Revenue, usually once a tax professional runs the ruler over it.
A provisional tax payment is made only when a company turns a profit; that means the customer usually has the means to pay their tax. Those business owners experiencing a seasonal downturn could expect to pay nothing or be refunded straight away for any tax they have overpaid.
Tax professionals using AIM tell us this is helping to instil better financial discipline in their clients, ensuring that they stay on top of their debts and can keep a more accurate track of their growth.
Success stories using AIM
On our IR website are examples of how real customers who used AIM in its first year have benefited. One is a horticulture business that earned a profit between September and April. Under the standard method, the owners were being stung with a provisional tax bill for NZ$40,000 in August, when there was no money rolling in to pay it.
After signing up for AIM, however, tax payments started evening out into smaller chunks throughout the year, and for May through to August there was no provisional tax payment.
The end of the financial year revealed other customers with similar experiences. What’s even more gratifying is the vast majority of AIM customers had an end-of-year wash-up of less than NZ$50, which shows the real certainty this option provides.
“The vast majority of AIM customers had an end-of-year wash-up of less than NZ$50, which shows the real certainty this option provides.”
Several tax professionals have told us that AIM statements of activity are reasonably straightforward and quick to prepare, giving them more time to devote to their customers’ other needs.
Inland Revenue is committed to continuously improving AIM and making it more appealing to a wider range of businesses. We already have almost 600 different business categories represented in AIM and there’s potential for many more.