New IRD software to smooth provisional tax

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New Zealand businesses are set to potentially benefit from next month onwards due to an accounting software add-on designed to negate certain pitfalls of provisional tax.

New software integration means that paying tax can follow what some would consider to be a more commonsense approach and match with businesses real results.

Beginning April, 2018 the Inland Revenue Department (IRD) will launch the Accounting Income Method (AIM) software, which is set to create another significant change to New Zealand’s provisional tax system.

The software has been developed to operate via any of three cloud accounting packages being, Xero, MYOB and Reckon. If it functions as promised then relief may be on the horizon for those who still suffer penalties or cash flow problems associated with inaccurate estimations of their provisional tax calculations.

The general idea is that paying tax under the AIM method will no longer be a stand-alone event occurring only a few times a year and will instead simply become a regular part of running a business.

Businesses that elect to take up the new AIM system for their provisional tax payments will have the majority of the guesswork associated with provisional tax removed. This is due to the system allowing smaller, more regular and more accurate payments to be made and only when the company has turned a profit.

Another appealing factor to many will also be the fact that if their business does drop in profit they will be able to immediately receive a refund of the overpaid provisional tax rather than being left out of pocket waiting on a refund until the end of the year.

According to the IRD the new AIM system will calculate on each due date, the provisional tax payment required or refund your business is entitled to via a statement of activity.

Due dates will generally be monthly or every two months aligned with a company’s GST payment dates for simplicity.

The statement of activity will take into account all necessary information drawn from your accounting software package such as your depreciation register, debtors’ and creditors’ ledger, salaries, wages and previous year losses to calculate the necessary provisional tax payment at the appropriate rate.

Changes to the current provisional tax system have occurred over the past few years, however the major concern remains that it is still based on underlying guess work and results in significant sums of money being tied up for long periods.

The penalties associated with those estimates being too low are well known and the only benefit of over paying, a minimal 1.02 percent interest gain on your funds. Issues such as these are what have driven the development of AIM software.

While these mentioned benefits of AIM advertised by the IRD sound promising, from a practical perspective, considerations still need to be made.

Although one of the suggested benefits is improved cash flow management, AIM requires payments based on profit to be made. This is when income is earned rather than when cash is received.

For those businesses with challenges managing cash flow, operating on an invoice basis for GST, it may be impractical. AIM may be more suited for businesses operating on a payments basis for GST with regular cash flow.

For businesses that do want to switch, eligibility requirements for paying provisional tax via the new system are set to be relatively straight forward. The system is targeted at small to medium entities (SMEs) therefore total turnover must be under $5 Million.

Businesses will also need to be using one of the previously mentioned accounting software systems by the beginning of the financial year.

There are also a few exceptions for certain situations where AIM can’t be used, these include partnerships, businesses which have foreign investment funds, trustees or beneficiaries of a trust, Maori authorities and those that have changed balance date in the current year.

These exclusions, alongside issues surrounding seasonal businesses and compliance requirements, mean initially the uptake of the AIM system may be quite small. However should the new system prove over time to be popular with SMEs, the government has stated that there is potential for it to be made available to larger tax payers down the track.

Effective businesses should watch this space rather than jump in.

The comments in this article of a general nature and should not be relied on for specific cases. Taxpayers should seek specific advice.

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Tracey Clark

Tracey Clark is a PwC director based in the Waikato office. Email: tracey.e.clark@nz.pwc.com