Taking AIM – a new provisional tax method
Inland Revenue has recently released further details about their new provisional tax system known as the Accounting Income Method (AIM), due to roll out in the 2018-19 income tax year (i.e. 1 April 2018 for most taxpayers).
AIM enables certain types of provisional taxpayer to use a ‘pay as you earn’ approach, similar to the GST “ratio method” regime. All other provisional tax methods remain, but AIM is most closely aligned with the efficiencies that come with cloud accounting.
Using Inland Revenue approved AIM software (such as Xero and MYOB), taxpayers can calculate their monthly or two monthly taxable profit and pay their provisional tax based on this calculation.
Taxpayers registered for monthly GST will make payments twelve times a year, and those not registered or registered two or six monthly will make payments six times a year.
The calculation of taxable profit will include making tax adjustments for depreciation, private expenditure and closing stock, among others.
If a taxpayer makes a loss, or find they have overpaid provisional tax under this ‘pay as you earn’ approach, they are entitled to a refund, relieving the strain on cash flow. Payments made under other provisional tax methods are typically locked away until the year end tax return is filed.
There is also less ‘crystal ball gazing’ since the calculations are based on actual results for a specific period, rather than having to forecast earnings for the whole year. AIM also limits exposure to use-of-money interest, although recent provisional tax changes have made this less of a risk than in the past.
One drawback of AIM is that tax calculations will need to be done every month or two months. It is apparent that Inland Revenue will rely on adviser oversight to ensure that the regular tax adjustments made are accurate. It remains to be seen how forgiving Inland Revenue will be for genuine errors or omissions made under the new method.
To find out if AIM is right for your business, please contact your BDO adviser.