Can AIM taxpayers use tax pooling?
A taxpayer cannot use tax pooling to defer payment of, or settle, provisional tax instalments calculated under the accounting income method (AIM).
However, Tax Management NZ (TMNZ) can help AIM taxpayers with terminal tax or when they receive a notice of reassessment.
What does tax pooling legislation say about AIM?
Legislation in the Income Tax Act 2007 clearly states that a taxpayer can use tax pooling funds to satisfy “a provisional tax liability other than under the AIM method”.
Please refer to sections RP17-RP21 of the Act for further information.
Why IRD doesn’t allow tax pooling to assist with AIM payments?
Inland Revenue (IRD) says tax pooling manages taxpayers’ uncertainty around provisional tax payments and their exposure to interest.
Consistent with this objective, pooling is not currently available for tax types where someone has certainty of their liability at the time of payment (for example, GST).
Given the payments made under AIM are calculated on actual accounting profit, taxpayers will have certainty about what's due.
As such, it's IRD’s view that it's not appropriate to allow tax pooling for provisional tax payments calculated under AIM.
What does that mean for you?
IRD will reject the use of any tax pooling funds to satisfy an underpaid AIM instalment. As a result, late payment penalties and interest will continue to show on a taxpayer account.
They will, however, accept the use of tax pooling funds to settle a terminal tax liability. The same applies if an AIM taxpayer has additional tax to pay after receiving a notice of reassessment.
Please be mindful of these facts when entering arrangements with TMNZ.
It’s also an important consideration before electing to use AIM to calculate provisional tax.
That's because paying tax when income is earned is not necessarily the same as when cash is received.
If someone is unable to pay an AIM instalment on time or in full due to cashflow constraints, the safety net of tax pooling will not be available to reduce their exposure to interest and eliminate late payment penalties.
You're more than welcome to contact TMNZ if you have any questions.
AIM and tax pooling
Legislation prevents taxpayers from using tax pooling to pay AIM provisional tax instalments.
We are issuing this reminder as IRD notifies us they are seeing several tax pooling transactions for these types of payments.
Section RP17B (2)(a) Income Tax Act 2007 says an amount held in a tax pooling account on behalf of a taxpayer can only be used to satisfy a liability for “provisional tax other than under the AIM method”.
That means that a taxpayer using this provisional tax method is unable to use TMNZ to defer an upcoming AIM instalment or reduce their interest cost if they fail to make this payment on time or in full.
IRD will reject these transfers.
The only time an AIM user can use tax pooling is for terminal tax – for example, an amount that’s due on 7 April – or if they receive a notice of reassessment from IRD.
This is something accountants need to be aware of before signing clients up to this option.
Why IRD doesn’t allow tax pooling
IRD says it is not appropriate for taxpayers to use tax pooling for AIM provisional tax instalments because payments under this method:
- Have certainty.
- More closely match income flows of a business.
- Have no exposure to IRD interest (assuming a taxpayer pays the amount due in full and on time).
The Tax Pooling Intermediary Association, of which TMNZ is a member, and Chartered Accountants ANZ disagrees with that viewpoint. They say it assumes a taxpayer has the necessary cashflow to make their payments – but that is not always the case.
You can read both sides' argument here.
Usage of AIM
Uptake of AIM has been poor since it came into effect for the 2019 income year. According to IRD figures last year, only 1100 taxpayers are using this method. That works out to be about 10 percent of those eligible.
There are two IRD articles promoting AIM this year – yet curiously neither cites the current number of active users despite waxing lyrical about the benefits. This suggests it remains low.
TMNZ’s view is AIM is compliance heavy and will only suit a small handful of taxpayers.