AIM provisional tax payments are calculated using current year income and therefore reflect fluctuations between profit and loss throughout the current year. Where a business has periods of income and pays provisional tax and then has accounting losses in the next period, it is entitled to request a refund of the overpaid tax in the current year. Inland Revenue will refund over payments of tax where required throughout the year in much the same way as GST is currently refunded. A business can only seek a refund of tax it has already paid.
If a business does want to receive a refund, a process similar to the current GST refund process could be adopted, with a quick turnaround time.
Having overpaid tax refunded (without significant use of money interest risk) is a significant advantage over other provisional tax options.
A business would be given the option of not receiving a refund. Where they would need to pay these amounts back to Inland Revenue in the following period, a business might choose not to take the short-term refund and carry it forward or choose to apply it against a GST liability.
Example: The Pitt Company Limited (Pitt) manufactures steel components of wind turbines. As their income fluctuates throughout the income year they want to adopt AIM to more closely match their tax payments to their income earning cycle. Pitt has a 31 March balance date.
Pitt has the following income profile for a year:
|Date||31 May||31 July||30 Sept||30 Nov||31 Jan||31 Mar||Total|
|Tax Payment (refund)||42,000||(14,000)||84,000||(16,800)||70,000||28,000||193,200|
Pitt does end up overpaying tax in two of the six two-monthly instalments because of the way the income of the company fluctuates throughout the year, however, these “overpaid” amounts are required to be repaid later in the same year.
This method would still provide a better outcome for Pitt than the current provisional tax rules, which would see them pay three even instalments of $64,400 each in August, January and May.