New Act introduces changes to the method of provisional tax calculation, improvements to interest and penalty calculations.
The Taxation (Business Tax, Exchange of Information, and Remedial Matters) Act 2017 was enacted on 21 February 2017 and took effect from 1 April 2017 (1 April 2018 for the AIM provisional tax method). Among other changes, there is a new method of provisional tax calculation, and improvements to interest and penalty calculations which will give more money to businesses.
Accounting Income Method (AIM) for provisional tax
There are currently three ways of calculating provisional tax: standard, estimation and ratio methods (see sidebar). The standard method uses the past year’s tax as a proxy for the current year. But a business can alternate between good and bad years. The standard method can leave taxpayer paying too much in a poor year; or paying too little at the beginning of the year, and paying a large terminal tax bill with interest.
A fourth method, Accounting Income Method or AIM, will become available from 1 April 2018 for the 2018/2019 tax year. AIM taxpayers must provide Inland Revenue with a statement of activity generated from an AIM-capable accounting system. The statement of activity will calculate the profit or loss for the one or two month period, and the resulting tax liability or refund. Tax refunds can be transferred to shareholder tax liabilities within certain parameters. This means that your tax payments are aligned to your profit level during the year, instead of artificially spreading them evenly across the year.
Taxpayers are already able to file and pay their GST returns via approved software providers, and AIM extends this service to provisional tax. AIM is suitable for businesses which have accurate up-to-date accounting systems and robust end-of-month accounting processes. If monthly profits are an accurate indicator of taxable income, then AIM may be suitable for your business, especially if your business has seasonal fluctuations. If your bookkeeper or accountant spends a lot of time reconciling your bank accounts, recoding your transactions, taking up year-end tax adjustments or you have complex income-sharing provisions, then AIM probably isn’t for you.
AIM gives IRD the power to issue determinations on the tax rate and core adjustments to be made in calculating taxable income. While the intention is to reduce compliance costs for taxpayers, the practicalities of this new method is unknown until the statement of activity and the IRD determinations are released. We expect to see further information from IRD and software providers about AIM in the coming year, so keep a watchful eye out.
Use of money interest
Standard provisional taxpayers for 2017/2018 year with residual income tax (* see sidebar) of $60,000 will be exempt from use of money interest, up from $50,000. This new exemption threshold will also apply to non-individuals (companies and trusts). The legislation also creates a new class of “interest concession provisional taxpayers” – taxpayers that use the standard method (or estimate the final instalment) with “provisional tax associates” that also use the standard or ratio methods. Interest concession provisional taxpayers will only pay use of money interest from the final instalment date. This means that more taxpayers won’t have to pay use of money interest at all and many of the remaining taxpayers will have less use of money interest to pay. AIM provisional taxpayers will also be exempt from use of money interest.
Late payment penalties
The 1% incremental late payment penalty is being removed from GST, income tax and overpaid Working for Families tax credits, although the initial 5% penalty remains. This is great news for the taxpayers with cash flow problems, as their repayments won’t be eaten up by penalties.
The changes to use of money interest and late payment penalties will improve the cash flow of small to medium taxpayers. The AIM provisional tax method aims to please taxpayers with reduced compliance costs and alignment of payments with the profit cycle. Whether AIM accomplishes this objective is yet to be seen, as the detail has yet to be published
Author: Serena Irving
Serena Irving is on maternity leave from accounting firm William Buck Christmas Gouwland Limited. She is an associate member of the Restaurant Association and regular contributor to this magazine. Contact Serena on 021-463-086 or find her on LinkedIn: https://www.linkedin.com/in/serenairving
The information in this article is general in nature and is not intended as tax advice. For specific advice on how the tax changes affect you and your business, please contact the author or your tax advisor.