Accounting Income Method - Provisional Tax Solution Post COVID-19

4 May 2020

If your business has been affected by the COVID-19 pandemic and you have large upcoming provisional tax payments based on pre-COVID-19 profits, switching to determining your provisional tax payments using the Accounting Income Method (AIM) may be beneficial.

The other alternative is to use the estimation method to determine your provisional tax liability for the 2020-21 tax year. Inland Revenue is recommending estimation as a way to manage provisional tax payments on its website. However, using the estimation method will expose you to use of money interest if the estimated tax payable is less than the actual tax payable for the year. While Inland Revenue has powers to remit penalties and use of money interest for those impacted by COVID-19, there are steps that you must go through before Inland Revenue will grant remission. Remission is not automatic and does not necessarily extend to penalties and interest arising from an incorrect provisional tax estimate.

Why AIM?

AIM allows you to use data from your accounting software to calculate the tax payable in each period. The tax payable is based on your profit for that return period, subject to adjustments. This should be hugely beneficial if you are currently experiencing losses or significantly reduced revenue due to the COVID-19 pandemic. Some adjustments to accounting income records must be made, for example private expenditure, but other adjustments such as depreciation are optional, but may be beneficial.

AIM Eligibility

To be eligible to use AIM for provisional tax, you must:

  • Have a turnover of less than $5 million per annum;
  • Be a company or a sole trader; and
  • Cannot be part of a consolidated tax group.

Further, you must use an approved software package to generate AIM returns. The three approved software providers for AIM are Xero, Reckon and MYOB.

Election Requirements

You can elect to use AIM at any time during the income year.

Once you have elected to use AIM for an income year, you must continue to use it for the remainder of the income year. However, if you elected into AIM for the 2020/21 income year, you could return to using the standard uplift method for the 2021/22 income year, if you wished.

Filing Requirements

Returns are filed bi-monthly (every second month), unless you are registered for GST on a monthly basis, in which case you file monthly returns.

To remain using AIM in an income year, you must not miss your filing requirement more than twice (subject to IRD discretion) otherwise you will revert to the estimation method and may be subject to use of money interest.

Important considerations prior to switching to AIM

Although switching to AIM can be beneficial, particularly if you are currently experiencing losses or a significant decline in revenue, there are some fish hooks that should be considered before making the change.

You should only consider AIM if you are prepared to be extremely organised with your accounting information, as missing filing requirements more than twice in a year will result in you reverting to the estimation method and use of money Interest may apply.

Further, return preparation is more complicated so there can be higher compliance costs - tax pooling is unavailable if you have difficulty paying your income tax.

Your Findex advisor can assist you in determining whether switching to AIM is best for you and your business, and can also assist in meeting your ongoing obligations under AIM. Please reach out to our team today.

Disclaimer:

Findex NZ Limited trading as Findex

While all reasonable care is taken in the preparation of the material in this communication to the extent allowed by legislation Findex accept no liability whatsoever for reliance on it. All opinions, conclusions, forecasts or recommendations are reasonably held at the time of compilation but are subject to change without notice. Findex assumes no obligation to update this material after it has been issued. You should seek professional advice before acting on any material.

The information contained is of a general nature only and does not take into account your objectives, financial situation or needs. You should consider whether the information is suitable for you and your personal circumstances. You should seek personal financial advice before acting on any material.

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