Is the new tax option right for you? Probably not! Yes, I’m serious. This new pay-as-you-earn option of paying your provisional tax almost got it right, but not quite. The concept is good but it’s really not a whole lot different to the ‘Ratio’ method which crashed and burned a few years ago!
Why isn’t it right for many of you? Essentially, it’s unlikely to work well for you, if like most small New Zealand businesses, you run your accounting software at a basic level (perhaps only using it for invoicing & GST returns) and your Chartered Accountant takes care of all the tax adjustments at the end of the year, like shareholder salary calculations. This is completely normal and works incredibly well for most businesses but it means that most small companies don’t end up paying provisional at all (it’s normally you, not the company, who pays the provisional tax) so under the new system you’ll need to tackle the complexities of enabling your company to pay provisional tax at your personal tax rates. (Personal tax rates can be anywhere from 17.5% to 33% while companies pay a flat rate of 28%).
The upshot of all this is that, for an accurate result, you’ll need to make regular and precise provisions particularly for shareholder salaries (or tax transfers). These type of calculations are technical and best left to chartered accountants. Any decent chartered accountant will require you do management accounts regularly so you’ll need to decide if you’re happy paying a little extra for that added financial support throughout the year.
For the very limited few of you that this works for (soletraders & contractors, mainly) here’s what you need to know:
- your turnover needs to be less than $5 million per year
- you must be running your accounting software properly (Xero Tax Practice Manager, MYOB etc)
- there will be no interest or penalties if you pay on time
- you also won’t receive interest if you pay too much
- if you pay too much, it can be refunded without waiting until the end of the year
- if you miss a payment, you can’t buy back-dated tax to rectify this !!!
- you’ll pay tax six times per year (instead of three)
- you don’t need to enrol or register (simply turn on the AIM functionality in your software)
- are you happy giving the IRD this level of access to your internal accounting system? (I’m not!)
- you’ll need to map your chart of accounts to the AIM statement (similar to an IR10)
- losses brought forward won’t be available until assessed
- trusts, beneficiaries of a trusts, partnerships, LTC’s and those with foreign investment funds can’t use AIM
- it’s smart to have your chartered accountant involved to minimise errors & for Xero Tax Practice Manager
- you don’t have to be GST registered to use AIM (accounting income method)
- if you’re not good at doing things on time, AIM might not be right for you because if you miss two returns you’ll fall out of the system making things incredibly complicated and expensive
If your profit is relatively stable and consistent, you’ll end up paying your tax earlier under the AIM method. It’d be far smarter to have that money sitting in your bank account earning interest!
More information here and in the Tax Information Bulletin Vol 29, No 10, November 2017.
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Copyright © 2018 Boutique Financial Limited Chartered Accountants Auckland All Rights Reserved. This publication must be read in accordance with the attached disclaimer and does not provide an exhaustive statement of tax law.