Introducing the new Provisional Tax method ...
From the 2018/19 financial year, businesses will be able to take advantage of the Accounting Information Method for paying provisional tax.
In a nutshell, it is like a Pay as You Earn approach for your business income.
The current standard provisional tax method assumes 5% growth on income tax each year and gets you to pay this over three instalments.
This works great when your tax bill grows by 5% each year, but doesn't when:
- It's your first year of operation.
- There has been growth or decline in your business that isn't equivalent to the 5% growth that Inland Revenue assumes.
- You have seasonal income.
- Your crystal ball is a bit cloudy on how the business will perform at the first and second instalment dates and it transpires that you underpay your tax.
Unfortunately, the outcome of any of these common situations is that at a minimum you will be charged interest by the Inland Revenue and in some cases penalties.
How does the new Accounting Information Method work?
The Accounting Information Method (AIM for short) harnesses the move by businesses to cloud accounting and also takes advantage of the Inland Revenue's improved tax management systems.
First off the Provisos or rules:
- Your business needs to turnover less than $5 million.
- You are not a Partnership or Trust (along with a few other structures that most people don't use).
- You need to be using approved accounting software.
- You need to file on time, being tardy will get you kicked off this method.
Every two months along with your GST return you will also transmit basic profit information from your accounting system to the Inland Revenue, this is what tax will be calculated on. Payment for this tax will then be paid at the same time as making your GST payments.
Benefits
- You'll be paying your tax as you go and it will be more inline with your cashflow.
- If you're GST registered on a payments basis, your AIM tax calculation is also mostly cash based which aligns with cashflow as opposed to paying tax on money still owed to you.
- We don't need to work out the split between shareholder salary or company profits as the total tax paid can be shifted between the company and shareholders easily (which currently isn't the case).
- You will reduce any exposure to the IRD's interest regime.
Our takeaway on this method
We believe this method is going to be of great value to many of the businesses we help, although it will require maintaining the correct classification of income and expenditure throughout the whole year. We believe that this will reinforce businesses looking at their financial numbers more readily than perhaps they do right now, which in our opinion can only be a good thing!