Small businesses around the country are enjoying a simpler approach to provisional tax – because they only pay a bill when they're making a profit.
The Accounting Income Method or AIM is now into its second year. It's provided through three accounting software providers as part of their package. That platform ensures AIM is tuned into a business's real-time account information, which in turn helps determine a real-time tax liability.
Richard Owen, small business segment leader at Inland Revenue, says AIM is taking the guesswork out of provisional tax.
"Our customers are enjoying the certainty of AIM. There's no squirreling money away to make sure you're not caught out at tax time, you simply pay the right amount of tax at the right time.
"AIM also significantly reduces exposure to penalties and use of money interest, a stress many small businesses are choosing to live without."
AIM is being used in a wide variety of industries from construction to rural services to hospitality. All that's required is access to AIM-capable accounting software; most businesses with annual turnover of less than $5 million are eligible.
"I would encourage business owners to have a conversation with their accountant about whether AIM is right for them," says Owen. "Some small businesses may have been wary of being early adopters but AIM has now been heavily user-tested and our customers are enjoying the benefits.
"We're hearing it's making provisional tax far more manageable, it's freeing up cash flow and small business accountants tell us it's encouraging good financial discipline for their clients."
Inland Revenue has added a few extra features for the second year of AIM to improve the customer experience – the main one being you can opt into AIM at any time of the year. Previously existing businesses needed to be set up and ready to go in time for the first filing but now they are free to start using AIM at any time. In addition, customers can pay their GST and provisional tax with one payment.
"Accountants made it clear to us they wanted AIM to be smarter at treating the profits the company pays to shareholder employees throughout the year," says Owen. "We've listened and now AIM gives you two ways to do this through software and still manage to pay the right amount of tax at the right time.
"That feedback included a strong plea from accountants and tax agents for us to turn off the stream of notifications their clients were receiving. We've now made that change and simplified the process to minimise any future confusion.
"AIM is improving all the time but it's still not a finished product and we will continue to adapt and make improvements. We are extremely grateful for the feedback we've had from our early adopters who have highlighted the ways AIM can better align with business processes. This shows us there's a strong demand for a pay-as-you-go provisional tax option as part of an accounting software package.
"We're seeing many of the accountants who have taken up AIM in the first year offering it to a wider range of clients. That's a vote of confidence that we're heading in the right direction in our goal to simplify provisional tax for small businesses."
Owen says AIM is well suited to businesses in their growth phase, particularly start-ups that need to closely manage precious cash flow.
"It's been interesting to note there's been a steady flow of new businesses to AIM, which I think is a sign entrepreneurs are placing a strong importance on getting tax obligations right from the start."
Business with seasonal income in particular will find using AIM is an advantage. It removes the need to make provisional tax payments during less profitable, leaner months.
AIM also takes away the difficult task of needing to forecast accurately income for provisional tax purposes: "Businesses know how hard this is to get right," says Owen. "There can be a lot riding on the accuracy of those predictions but it's a problem AIM makes redundant when you can simply pay tax as you go."
"Every piece of functionality has been designed to make provisional tax easier for small businesses. The last thing we want is for AIM to be creating an ongoing compliance cost burden.
"Like any new process, it takes some getting used to but, based on the feedback we're getting, once you are set up, AIM allows you to focus squarely on running your business and making money."
AIM is currently available as part of accounting software packages from MYOB, Reckon and Xero.
Speak with your accountant or tax agent about whether AIM will help your business and find out more at www.ird.govt.nz/AIM.