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Provisional tax accounting income method

AIM-capable accounting system

(Clauses 32, 34 and 46)

Summary of proposed amendments

A software system that is designed to offer AIM to taxpayers must meet the proposed definition of an AIM-capable accounting system introduced in this bill in order to gain approval from the Commissioner to be used to calculate provisional tax payments using the AIM method.

Application date

The proposed amendments will apply for the 2018–19 and later income years.

Key features

Proposed new section RC 7B of the Income Tax Act 2007 explains the AIM method and defines what an AIM-capable accounting system must be in order to gain the Commissioner’s approval. To meet the definition and be approved as an AIM-capable accounting system, the core software accounting package must have the ability to:

  • generate and keep comprehensive financial accounts, including accounting income and expenditure, ledger accounts, trial balances, bank account reconciliations, and journals, on an on-demand basis, in accordance with good accounting and tax practices;
  • calculate tax liabilities using tax adjustments in accordance with the Technical Determination as proposed in clause 46;
  • for tax adjustments not included in the Determinations, ensure they work towards reasonably accurate assessments of tax liabilities;
  • recalculate all financial accounts and liabilities retrospectively and produce reports as required by the Commissioner; and
  • communicate electronically with Inland Revenue and provide the right level of help assistance to its users.

The amount calculated by the AIM-capable accounting system is the amount due to Inland Revenue on each instalment date as proposed in clause 34 in section RC 10B of the Income Tax Act 2007.

Detailed analysis

Only comprehensive software accounting packages would be able to offer AIM to ensure that taxpayers can use a package that is fit for purpose. Packages must work in accordance with good accounting and tax practice to ensure that reliable financial statements are produced. This implies routine examination of processes and calculations to ensure the efficiency and effectiveness of practices are improved over time.

This definition is not limited to cloud software and does include software packages that are generally desktop-based but can access the internet or prepare reports that can be sent to a third party for review (hybrid products). A desktop must also be kept up to date and the version of the software will be provided to Inland Revenue at the time of payment to ensure this is the case. The only software that is considered to be excluded from this definition is a home-prepared Excel spreadsheet. This is due to there being no controls or commonality over its preparation and treatment of tax adjustments.

The Determinations proposed in section 91 AAX of the Tax Administration Act 1994 set out the requirements for which expense and income items need to be adjusted for tax purposes. Therefore any accounting software system must be able to make these adjustments as required by the Commissioner. This will ensure that material adjustments are consistently treated by all software packages.

For any tax adjustments not defined in the proposed Determinations, the accounting software must provide reasonably accurate assessments of tax liabilities.

The software must be able to recalculate all financial accounts and liabilities retrospectively and produce reports as required by the Commissioner. This is to ensure that when an error is discovered – for example, a late invoice, the invoice can be entered into the system and the cumulative impact of that correction will flow through. Past periods will not need to be re-filed following the discovery of an error.

The software must also be able to communicate electronically with Inland Revenue and provide the right level of assistance to its users. It is expected that taxpayers will elect to use AIM through the software itself and that the Statement of Activity will be provided to Inland Revenue electronically. Inland Revenue understands that accounting software packages do not require a high level of internet capability to function, so those in remote areas with limited bandwidth can still use it successfully. As an exception, in the event of a software failure or internet failure, the Commissioner will accept a paper copy of the return.

Section RC 10B provides that the amount calculated by the AIM-capable accounting system is the amount due to Inland Revenue on each instalment date. This is the amount the provisional taxpayer must pay to Inland Revenue.