The recently introduced way of paying tax is up and running; the Accounting Income Method (AIM). Its goal is to simplify provisional tax – but is it really? As it turns out, not every business can use AIM and then a whole lot of other business don’t want to. Why is this?
As TaxBuddy – whose sole purpose is to simplify tax (and we’re succeeding too!) we’re taking a closer look at AIM. Here an overview of ups and downs and alternatives – as remember, AIMs method is optional.
What is AIM
AIM is a way of paying provisional tax where the businesses with an annual turnover of less than $5 million use the information from their accounting software to calculate and pay their provisional tax, at the same time as they prepare their GST return.
Who can and can’t use AIM
- The AIM method applies to companies and sole traders
- AIM is not yet available for trusts or partnerships
- Annual turnover of $5,000,000 or less
- You need to be using “AIM capable software” for your book-keeping (such as Xero and MYOB)
- As AIM automatically calculates tax on what is earned, it’s particularly suited to businesses that are new, growing, have fluctuating profits, have irregular or seasonal income or find it hard to accurately forecast their income.
Benefits of AIM
- No surprises at end of the year – Pay tax as you go, the amount of tax paid will be in line with the amount earned, meaning businesses pay tax when they have the money. This makes AIM very flexible when it comes to economic shifts and a great option for start-ups and businesses with fluctuating income.
- No IRD interest charged on underpayments or overpayments – changes to the Use of Money Interest (UOMI) rules mean that this is now considerably less harsh than it was, meaning the major benefit of adopting AIM (avoiding UOMI) are now substantially gone)
- Greater accuracy – as the AIM calculations are so specific, it’s expected that businesses either won’t have income tax liability or if they do, they will be very small.
- Avoid cash flow problems – if businesses pay tax in full and on time, they won’t be charged Use of Interest Money. Businesses that make a loss or overpay will be able to get a refund straight away.
- AIM will be responsive to changing business conditions too. If economic conditions tighten and a business’ tax liability drops, Inland Revenue will refund overpayments, in much the same way that GST refunds are handled.
Downsides of AIM
AIM won’t suit everyone. Here are some downsides of AIM.
- AIM does not the those:
– with complex year-end tax adjustments.
– whose accounting software isn’t 100 percent tidy.
– with seasonal income concentrated at the beginning of the year.
– earning large amounts of overseas income.
- AIM users cannot use tax pooling if they are struggling to pay provisional tax
- Those operating as a partnership or trust cannot use AIM. AIM requires quite a bit more work than initially envisaged, particularly from the taxpayer. The information that you currently prepare annually as part of your financial statements may be required every two months. That could impose new compliance costs on small businesses.
- In order to use AIM, you have to be using an approved software package such as Xero or MYOB, so Excel and Banklink won’t work.
- AIM reporting is only available through tax agents accounting systems which means you will be required to do all your GST reporting and filing through your accountant if you want to use AIM. That could increase your accounting fees.
What should you do?
If you choose to use AIM, you have to start from the beginning of the tax year. So if you haven’t started already, you have to wait until April 2019, If you have started using AIM, but struggle with it, you can stop filing AIM returns and IRD will start treating as you were using estimation method.
Have a good think for your key reason to go with AIM vs the Standard Method. Is it to make more accurate payments? Probably yes. But do you also have to make an actual payment, or is ‘putting the money aside’ enough? If so, can you do a better calculation yourself, or you could look into software like TaxBuddy.