Provisional tax will soon be easier for small business.

A new option is coming that will allow businesses to manage provisional tax via their accounting software.

The system – ‘AIM’ – will allow businesses to pay provisional tax every month (if they file GST returns monthly) or every two months.

In each case the amount of provisional tax would be based on the last month or last two months of income.

The new option is quite different from current options for provisional tax.  Currently businesses must pay provisional tax three times a year – based on what they earned the previous year, or what they estimate they might earn in the current year.

Neither method is very satisfactory, because quite often the payments don’t match up with the business’ actual cashflow.

The new AIM option will mean businesses will pay smaller amounts during the year, with less likelihood of an unexpected tax bill at the end of the tax year.

AIM will be available for businesses that have an annual turnover less than $5 million and that use an MYOB, Reckon or Xero accounting package with AIM functionality

The accounting software will work out how much provisional tax needs to be paid, at the same time as it’s working out your GST.

AIM will address a key problem faced by small business: the requirement to pay provisional tax when no profit has been made.

Using the AIM option, if a profit has not been made in the preceding month or two months, no provisional tax payment will be required. And if the business goes into loss in any month or two month period, it can get an immediate refund of any overpaid provisional tax in an earlier month.

Another benefit of the AIM option is that as long as you pay what the software tells you to pay, in full and on time, businesses will not be liable for use of money interest.

The AIM option for provisional tax will be available for use from 1 April.

More information is on www.ird.govt.nz/AIM

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