Changes to the provisional tax rules a step closer

The Taxation (Business Tax, Exchange of Information, and Remedial Matters) Bill has passed through Parliament and now awaits Royal assent. This Bill introduces new rules to tighten foreign trust disclosures, changes to the provisional tax rules and a number of tax simplifications for businesses.

A key compliance issue for many taxpayers is calculating and paying provisional tax. Central to this Bill is the introduction of the accounting income method (AIM) for calculating provisional tax. AIM will give smaller businesses a new pay-as-you go option for calculating and paying their provisional tax. Qualifying taxpayers will be able to use AIM to calculate their provisional tax from 1 April 2018. AIM is intended to allow small taxpayers to use their accounting software to calculate and pay their provisional tax.

Use of AIM will be on an opt-in basis, but taxpayers will be required to satisfy certain criteria before they will be entitled to opt to use AIM. To be eligible to elect to use AIM, the taxpayer must have an annual gross income of $5 million or less and be operating an AIM-capable accounting system that is up to date for the relevant tax law for the income year it is to be used to determine the taxpayer’s provisional tax liabilities. An AIM-capable accounting system will be an Inland Revenue approved accounting software package that meets Inland Revenue’s standards and requirements for generating financial reports, calculating tax liabilities and electronically communicating prescribed information to Inland Revenue. The AIM-capable accounting system will calculate the taxpayer’s provisional tax liability at a particular payment date based on the information on the taxpayer’s financial performance to that date.

Those electing to use AIM will pay their provisional tax in line with their GST filing dates – 12 times a year, six times a year or twice a year depending on their GST registration basis. As well as filing their GST return, those using AIM will supply provisional financial information to Inland Revenue (similar to the existing IR 10 provided with the annual tax return) in support of their provisional tax payment for the period. This will mean that those electing to use AIM may need to work more closely with their accountant during the year to ensure transactions are correctly coded and entered into their accounting software, rather than leaving the “tricky” transactions for the accountant to sort out at year end. Taxpayers using AIM will be entitled to refunds of overpaid provisional tax during the year where calculations for subsequent periods indicate they have paid too much and will not be subject to use-of-money interest on provisional tax payments. However, those using AIM will be subject to a standard of reasonable care which may result in penalties if this standard is not met in entering information and performing calculations.

Inland Revenue is currently working with the accounting and software industries to develop the framework for AIM-capable accounting systems. Once this framework is agreed, we can expect to see AIM-capable accounting systems becoming available hopefully ready for the start of the 2018-19 income year.

If you would like to discuss this topic further, please contact your local Tax adviser.