The accounting income method (AIM) is certainly generating plenty of chatter among small business owners.
Last month, we provided a detailed analysis on IRD’s new provisional tax payment method that was, er, aimed (forgive the pun) at accountants.
Below we offer a simplified list of the pros and cons of AIM. These are the things small business owners need to be aware of before opting in.
Accounting income method: Pros
- You will pay provisional at the same time as you earn your income. No profit made, no tax to pay. This will benefit those who earn their income at the tail-end of their year.
- No IRD interest charged if the tax paid under this method is less than actual income tax liability for the year. Any final balance will be due at your terminal tax date.
- Faster refunds of overpaid tax – no need to wait until the end of the year.
Accounting income method: Cons
- More, frequent tax payments throughout the year. You will pay up to six times a year (or 12 times if you file GST returns monthly) compared to three times under the standard uplift or estimation methods.
- You won’t receive IRD credit interest if you overpay tax for the year.
- Greater compliance cost. You must file a statement of activity for each period tax is due, on top of an annual income tax return. Each statement of activity must include any tax adjustments normally made at year-end by your accountant. Put simply, it involves more work.
- You will pay tax based on accounting profit. This may not reflect your current cashflow position.
- AIM is highly reliant on the accuracy of the data you enter into your accounting software. As such, you may incur a shortfall penalty if you don’t take reasonable care when calculating payments.
- It won’t suit those who earn their income at the beginning of the year.
- Those operating as a partnership or trust cannot use AIM.
- Once you are in, you will not be able opt out of AIM until the start of a new income year.
- If you fall out of AIM, you will have to use the estimation method for the remainder of the year. IRD will treat you as if you were an estimation taxpayer from the beginning of your year. Interest will apply on any underpaid tax.
- You cannot use tax pooling. This is important because if you file your statement of activity, but don’t pay what’s due on time, you’ll be liable for IRD interest and late payment penalties.
Accounting income method: Overall verdict
So, as you can see, AIM contains a few fish hooks and will suit only some businesses.
It is also worth mentioning that many smaller taxpayers now fall outside of IRD’s interest regime if they pay their provisional tax using the standard uplift method and what they owe for the year is less than $60,000. See here for more in-depth detail.
As always, we recommend you speak with your accountant about AIM before doing anything.
If you wish to learn more about how Tax Management NZ helps businesses match their provisional tax payments to when they earn their income, email email@example.com or phone 0800 829 888.