The Taxation (Business Tax, Exchange of Information, and Remedial Matters) Bill introduced to Parliament on 8 August includes a range of measures designed to simplify business taxes, including a new way for businesses to pay their provisional tax. The Bill also includes new disclosure requirements for foreign trusts following the recommendations of the Shewan Inquiry instigated after the release of the “Panama Papers” and provisions to implement the G20/OECD standards for the automatic exchange of information with which New Zealand financial institutions will be required to comply.
However, for most business taxpayers it will be the proposed new method for paying provisional tax – the accounting income method (AIM) – that will be of most interest. Currently, there are three methods for calculating provisional tax: the standard uplift, estimation and GST ratio methods. AIM will not replace these methods. It will be a fourth option available to taxpayers for calculating their provisional tax liability.
Currently, most businesses meet their income tax liability by paying provisional tax in three instalments throughout the year. Inland Revenue charges use-of-money interest as if the taxpayer earned their income evenly over an income year, where provisional tax paid is less than their final tax liability for the year. The due date for these payments is fixed with reference to the taxpayer’s balance date rather than when the taxpayer earns their income. For taxpayers in highly seasonal businesses whose income fluctuates during the year, having to fund tax payments based on expected full year income in a “quiet” part of the year can be problematic.
Under AIM, the payment of provisional tax would be integrated into business processes and payment amounts would be based on current year tax-adjusted income. It is intended that software developers will upgrade their packages so that they can calculate tax-adjusted income on an ongoing basis. Taxpayers using an AIM-certified software package, who meet the other eligibility criteria, will then be able to pay provisional tax based on the liability calculated by the software package. The payment of provisional tax will be aligned with GST payments. Therefore, a person registered for GST on a two monthly basis would make six payments of provisional tax for each tax year at the same time as they paid their GST.
A taxpayer will be able to use AIM to calculate their provisional tax if they:
- elect to use it before their first payment date; and
- use an AIM-capable accounting package that is up to date; and
- have gross income below $5 million or have approval from Inland Revenue as a previous user of AIM if their income is over $5 million; or
- are a member of the class of taxpayers with income over $5 million using a software package the Commissioner has approved for AIM.
A provisional taxpayer will not need to be GST-registered to use AIM. Individuals, sole traders and companies will all be eligible to use AIM, and if they chose to do so, must pay on a two-monthly basis.
It is intended that AIM will become available to taxpayers as a way to calculate their provisional tax from the commencement of the 2018-19 income year.
If you have any questions regarding provisional tax, please contact your local Crowe Horwath tax adviser.