Taking Aim at provisional tax
If you’re one of the many SMEs operating in New Zealand, you’ll know how difficult and time-consuming provisional tax compliance can be. Particularly if trying to make the calculations without accounting software or help from a financial advisor, business owners are often left frustrated knowing their time and efforts could have been spent elsewhere.
However, as of April this year, Inland Revenue has developed a new provisional tax payment option for small businesses. It’s called AIM – Accounting Income Method – and is a provisional tax payment method for enterprises which have a turnover of less than $5 million a year.
Can I use AIM?
If you’re just starting out – perhaps in your first year, or are still in the early stages of growth – then AIM is a good provisional tax payment option for you. It’s also suitable for businesses with irregular incomes; those whose cash flows are seasonal or unsteady.
As long as your turnover is less than $5 million a year and you’re using online accounting software such as MYOB Essentials, then you’ll be able to use the Accounting Income Method.
How does it work?
Unlike the IRD’s three alternative payment methods – standard, estimation and ratio – AIM lets you pay tax as you earn an income or make a profit.
Using new functionalities in accounting software, you can work out your tax payments with ease – and in half the time. Your accounting software will calculate how much provisional tax you are required to pay each instalment based on your past two months of income instead of the previous year. Not only is it more accurate, but it means you can avoid major cash flow problems.
You will, however, have to make provisional tax payments more often than you used to. If you have registered for GST, you’ll pay monthly, and if you’re not, you’ll pay every two months.
Why is it a good payment method?
If you make your payments on-time and in-full, then you won’t be charged use-of-money interest. Also, if you make a loss, you’ll be able to get your refund straight away and not at the end of the year.
It’s great news for start-ups and young businesses, as they’ll only have to pay tax on the results they achieve – rather than estimating how they’ll go and risk losing money when they need it the most.
Try MYOB Essentials for Free to ensure better accuracy of your financials. Your provisional tax is automatically calculated, which means no more guess work!
