AIM: The new way to pay tax
Intended to help ease cashflow for small business, there’s a new way to calculate how much tax to pay from 1 April this year. It’s called the Accounting Income Method (AIM) and it will mean that the tax you pay during the year will increase or decrease depending on how much profit you make.
Rather than paying tax every four months based on your previous year’s tax liability, you’ll pay every two months based on your profit to date. By increasing the frequency of tax payments, it should be easier to manage your cashflow over the year.
There are a number of changes that you can make to your reported income to work out the taxable profit. Those adjustments include:
- Add-back GST on receivables and payables if you’re on the GST payments basis so that you are calculating you tax only on the cash you have received.
- If you have tax losses you can include those, provided that IRD has approved those losses
- A salary allocation to the shareholders and the tax on those shareholder salaries will also be included in the calculation of total taxes in the AIM return.
- Making private use adjustments – things like private vehicle costs.
- Trading stock if you can take the figure from your stock system or reliably calculate it manually.
What the AIM adjustments will not take into account is the ability to offset profits in one company against losses in another. That also extends to offsetting shareholder salaries against rental losses. So it is important to understand the big picture.
There are no registration requirements – if you fill in an AIM return in May 2018 then you’re in that system for the rest of the year. And any of the adjustments you make must be applied consistently for the rest of the year.
If you’re using AIM you’ll not be charged any interest by IRD if you end up underpaying your tax for the year. If you have a couple of bad months and make a loss in one return period, then you can get a refund of the overpaid tax.
At this stage AIM is available for companies and sole traders who have turnover of less than $5M. If the shareholders are not taking a PAYE salary, then they will also include their tax in the company AIM return.
Trusts and partnerships are currently not able to use this system but that might change in time. Because a look-through-company is treated as a partnership for tax purposes, they will also not be eligible.
Because the AIM return is not part of a GST return, you don’t have to be GST registered to use AIM.
Any contractors who currently have resident withholding tax deducted from their income can ignore AIM completely – most likely you’re paying sufficient tax already.
What do I need to do if I want to use AIM?
While IRD is not intending to charge any penalties or interest if you are on AIM and end up underpaying your tax, we recommend that you only consider AIM if you have confidence in the accuracy of your numbers and can keep them up to date. A side benefit of the system will be that the accuracy of your bookkeeping will be improved – that will be great if you need to produce financial reports during the year for any reason.
It’s an opportunity to review the processes that your administrator/bookkeeper uses to ensure that you can rely on the reports in your system. Or maybe it’s time to implement a better system, if the cracks have been showing for a while.
If your inventory or project management system is not integrated with your accounting system and inventory or work in progress balances fluctuate significantly during the year you might want to consider improving your systems & processes.
The downside is that the AIM return can only be prepared on AIM-capable tax software. The Xero business software is not AIM capable but the additional Xero tax software we use is. So that pretty much means that the returns will be completed by a tax agent (that’s us, in most cases) with our tax software using the information from your system. Our tax system directly integrates with Xero so it’s easy to review your numbers and import directly into the return. We can currently set up a link between MYOB and Xero to pull data through to a Xero ledger automagically on a regular basis and use that to populate the AIM return. Other less common systems will be problematic.
If we’re completing the AIM returns throughout the year, we’d expect a reduction in the end of year accounts & tax return costs.
Want some help or want to know more?
We like the look of AIM because:
- You’ll pay more tax when you’re making more money and less tax when you’re not.
- You’ll be making more frequent tax payments of smaller amounts than you are used to. That will benefit your cashflow.
- You’ll not get charged interest by IRD, if you end up underpaying tax during the year.
- All the independent research shows that businesses are more profitable when they review their financial results regularly. You’ll have more confidence in the accuracy of your numbers and the quality of your reports and that means you should be able to make better decisions.
- Independent research also shows that business owners that work closely with their key financial advisers do better than those that don’t. By completing the AIM return we’ll have a better understanding of your financial situation during the year and be able to spot trends and work with you to improve your results.
- Our approach has always to put the business owner in control of their own finances. AIM will help you do that.
We’re planning on running some seminars on AIM and if you’d like to register your interest, click here. It would be helpful to know how many people would be interested in this free seminar or if we need to run several.
If you want us to take a closer look at your system and identify areas where you could improve your record keeping or systems then click here. As part of this work we’d also be able to identify the adjustments that will need to be made on the AIM returns. This one-on-one work would have a charge but could be eligible for 50% funding through a Capability Voucher