Loading income into the latter part of the year
Some businesses could attempt to manipulate the timing of payments of tax by reducing their accounting income through the use of provisions and delaying recognition of income. While GST returns will create a natural audit trail, there is a risk that a business could attempt to load income into the latter part of the year despite it being earned earlier.
One such area where this may occur is in relation to shareholder-employee salaries. A company using AIM, will only be allowed a deduction for shareholder-employee salaries when they have been paid within the two month period. This will result in overpaid provisional tax at the company level, which can be transferred with the same effective dates to the shareholder to meet their provisional tax liability. A notification process is envisaged from the shareholder to Inland Revenue to remove exposure to penalties for underpaid provisional tax at the shareholder level.
The Paying Tax as Agent proposal also mentioned in the Chapter 3 of the Issues Paper may also work well with AIM as it seeks to enable a company to pay provisional tax on behalf of its shareholders thus removing the shareholders from provisional tax altogether.
It is also possible there could be slippage from one payment period for income and/or expenses, but where these correct themselves within two periods it is likely this would be considered reasonable.
As mentioned earlier, Inland Revenue would expect a business and its advisors to take reasonable care in entering and coding their income and expenses, and any manipulation of income into the latter parts of the year would be viewed in this light. Where businesses are found to have manipulated payments, they would be removed from the AIM option and placed into the estimate option, where full penalties and use of money interest apply.
Use of tax pools
Pooling is not currently available for regular payments of tax types where there is certainty of the liability at the time of payment (for example, GST). As the payments made under AIM are calculated on actual income this provides certainty. Therefore, the use of pooling will not be permitted for AIM payments. It is likely the Government will consider reviewing the use of pooling for GST and AIM payments at a future date.
Although AIM does provide a results-based, pay as you go system for businesses, unlike PAYE on salary and wage payments, business income can fluctuate. If income is always positive, the cumulative tax position will always be positive.
However, where income fluctuates between profit and loss for particular periods, issues may arise with using AIM. This is most likely to be the case where profits are earned at the beginning of an income year and losses are incurred at the end. In some situations this issue could be resolved by a change in balance date.