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Provisional tax accounting income method

AIM approach eligibility criteria

(Clauses 31, 32, 40 and 45)

Summary of proposed amendments

The bill proposes the criteria that must be met before a taxpayer can use the AIM approach to calculate their provisional tax, and proposes that a taxpayer can be removed from AIM in particular circumstances.

Application date

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

Key features

New subsection RC 5(5B) of the Income Tax Act 2007 introduces the AIM provisional tax method. It states that when a taxpayer has elected to use AIM, and is currently using an AIM-capable accounting system as defined in new section 7B (2) in the Income Tax Act 2007, they may use AIM, provided they meet the right annual gross income levels, which are in three income groups.

Section RC 5(5B)(c) proposes that those with a gross income of $5 million and below can use AIM.

Proposed section 45D of the Tax Administration Act 1994 proposes that if a business has grown past this threshold and has been using AIM successfully, it can apply to the Commissioner to continue using AIM as a provisional tax method, assuming there is minimal fiscal risk to allowing this approval.

Proposed new section 45C of the Tax Administration Act 1994 provides that a business with earnings over $5 million can use the AIM approach, provided it is a member of a class of taxpayers using software that has been approved for large AIM businesses. These businesses are defined as those using an approved Large Business AIM-Capable system. This is a proposed new defined term in section YA 1 of the Income Tax Act 2007.

In certain circumstances taxpayers will be excluded from using AIM. Section RC 5(5B)(d) of the Income Tax Act 2007 proposes that if a taxpayer has been liable in one of the last four years for a shortfall penalty, penalties in relation to its use of AIM, or members of a class of taxpayers mentioned in the Determination issued by the Commissioner under proposed section 91AAY of the Tax Administration Act 1994, they will be excluded from using AIM.

This section also proposes that taxpayers will be removed from AIM if their use of AIM has meant they have consistently and systematically inaccurately assessed their tax liabilities. An addition to this, if a taxpayer fails to provide Inland Revenue with the required information on two instalment dates they will be removed from AIM during the year as well.

When a taxpayer is removed from AIM under section RC 5 (5B)(d) of the Income Tax Act 2007, proposed section RC 5(5C) states upon removal from AIM, the taxpayer will be required to use the estimate method and be treated as having used that method all year.

Detailed analysis

Eligibility

Section RC 5(5B) of the Income Tax Act 2007 provides that before a taxpayer can use the AIM approach to calculate their provisional tax they must:

  • elect to use it before their first payment date;
  • use an AIM-capable accounting package that is up to date;
  • have gross income below $5 million or have approval from the Commissioner as a previous user of AIM if their income is over $5 million; or
  • be a member of the class of taxpayers with income over $5 million using a software package the Commissioner has approved for AIM.

The majority of likely AIM users will be small-medium businesses as the tax adjustments required to accounting profit to calculate their taxable income are relatively small and simple. These smaller businesses also use standard accounting software packages purchased from software providers and are not using bespoke systems.

A provisional taxpayer does not have to be GST-registered to use AIM. Individuals, sole traders and companies are all eligible to use AIM, and if they chose to do so, must pay on a two-monthly basis.

While the initial focus is on small-medium businesses, there is also scope for larger classes of taxpayers to use AIM should a provider develop software that meets AIM requirements. Proposed new section 45C of the Tax Administration Act 1994 will enable AIM to be a provisional tax method available to larger businesses in the event that a software provider developed a package for a specific class of taxpayers who would not ordinarily use off-the-shelf software. They can apply under this proposed section to the Commissioner for approval of their systems to be used for a defined group of taxpayers. The Commissioner would have regard to the fiscal risks of allowing this class of taxpayers to use AIM.

Example

Winetrack Ltd creates accounting software specifically designed for large vineyards. It assists wineries with their management and reporting, dealing with specific issues like calculating an accurate real-time cost of goods sold using software that is designed specifically for wine-making processes.

As vineyards often have both seasonal income streams and unpredictability caused by weather and overseas exporting issues, many would benefit from using the AIM provisional tax method.

Winetrack approaches Inland Revenue to discuss and engage with Inland Revenue regarding their software and processes around major tax adjustments. Inland Revenue would consider the rigour of the software and whether or not taxpayers using Winetrack and AIM can make provisional tax payments that result in reasonably accurate assessments. Winetrack and Inland Revenue would work together to identify whether Winetrack would need to develop its software to deliver AIM capability. These requirements would be clearly stated in a Determination issued by Inland Revenue.

Following approval from Inland Revenue, Winetrack would offer AIM services to its subscribers and be subject to the same obligations as other AIM providers.

Exclusions

In certain circumstances taxpayers would be excluded from using AIM. Section RC 5(5B) of the Income Tax Act 2007 proposes this would happen if the taxpayer:

  • has been liable in one of the last four years for shortfall penalties in relation to its use of AIM;
  • is a member of a class of taxpayers excluded in the Determination issued by the Commissioner under section 91AAX of the Tax Administration Act 1994;
  • has consistently and systematically used AIM to inaccurately assess its tax liabilities; and
  • has failed to provide Inland Revenue with the required information on two instalment dates (Statement of Activity).

If a taxpayer is removed from AIM, it is proposed in section RC 5C that they be placed into the estimate method and be treated as having used that method all year and will have use-of-money interest applied.

The Statement of Activity is important because it demonstrates the robustness of the accounting system behind the amount paid as provisional tax. If this information is not provided to Inland Revenue, there would be no evidence that a comprehensive accounting system is being used by the business to calculate its accounting income results. As the Statement of Activity reports would be cumulative, if one is missed it could be supplied in the following period.

If a payment is missed, a taxpayer would not be immediately removed from AIM. The existing interest and penalties rules would apply to the underpaid amount.