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NZ Guides On New Method For Calculating Provisional Tax

by Mary Swire,, Hong Kong

27 September 2017

From April 1, 2018, New Zealand businesses with a turnover of no more than NZD5m (USD3.6m) will be able to use the new accounting income method for calculating provisional tax liability.

There are currently three methods for calculating provisional tax: the standard uplift, estimate, and GST ratio methods. The proposed AIM is not replacing these methods; it introduces a fourth method. Most businesses meet their income tax liability by paying provisional tax in three instalments throughout the year. Use-of-money interest (UOMI) is charged as if income was earned evenly over an income year, which is not realistic for many taxpayers.

The current dates for payment are independent of when income is earned, which does not work well for businesses with fluctuating incomes and tight budgets. New businesses benefit from not having to pay provisional tax in their first year of business but often struggle with making payments in their second year. AIM was announced by the Government in Budget 2016 as part of a package focused on tax reform for small businesses.

Inland Revenue has previously worked with software providers to enable GST returns to be filed from accounting software. This has simplified meeting tax obligations and reduced the amount of time that businesses spend on compliance. AIM is another step in integrating tax into business processes.

Under the proposed changes, provisional tax would be integrated into business processes and payment amounts would be based on current year tax-adjusted income. Businesses using AIM would have more certainty they are paying the right amount of tax as it will be paid as income is earned.

The Inland Revenue Department said that once companies opt in to AIM they will only pay provisional tax when their business makes a profit. It added that, provided payments are made in full and on time, businesses will not have to pay use-of-money interest. Meanwhile, loss-making businesses can get a refund straightaway, rather than waiting until the end of the year, the authority said.

Further details on the regime, about which companies are not eligible, and about how to opt-in have been released in guidance titled "New provisional tax option for small businesses," released by the Inland Revenue Department on September 22, 2017.

TAGS: compliance | tax | small business | business | tax compliance | accounting | New Zealand

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