Better Public Services Result 9 - Case Study: New option for small businesses will take the guesswork out of provisional tax
Inland Revenue’s got good news for small businesses – the accounting income method (AIM) will soon make provisional tax easier to manage.
From 1 April 2018, if turnover is less than $5 million per year, a small business can choose AIM to calculate and pay provisional tax using accounting software.
Businesses using AIM will pay their provisional tax as they earn profit, so they’ll have certainty about their tax.
AIM is part of a drive by the Government to use technology in a smart way to make tax simpler and give people more time to focus on their business.
Let’s imagine it’s already early 2019 and see how AIM is helping a typical small business.
“Pay-as-you-go” approach is ideal when sales go up and down
Sally designs and makes her own range of swimwear. Mike does the marketing and sales. They’re pretty organised and do all their business online – accounts, GST, sales, inventory, etc.
Sales fluctuate a lot. Every so often Mike manages to get Sally’s designs featured in one of the upmarket life and leisure magazines. That’s always followed by weeks of good sales and sometimes a large order from a big retail chain.
Their tax agent had suggested in early 2018 that Sally and Mike switch to AIM. She knew they were comfortable using software, so all they had to do on 1 April 2018 was turn on the AIM module in their accounting package. Now their software calculates their provisional tax every two months along with their GST, and tells them how much to pay.
The summer holidays at the end of 2018 were a disaster, compared with the previous year. Nobody buys swimsuits in the rain. Sally and Mike had three months where there was hardly anything coming in. But because they’re in AIM, they only pay provisional tax on the profit they’re actually making, not like the old system when the payments weren’t matched to how the business was actually doing at any point in time.
Then a department store cancelled a big order. Because they’re on AIM Sally and Mike were able to get a refund on the provisional tax paid in earlier months. They didn’t have to wait until the end of the year – their accounting software calculated the refund when it worked out the losses over that bad period, and Inland Revenue refunded the money straight into their bank account.
Sally doesn’t worry anymore about whether they’ve got it exactly right. As AIM users, as long as they pay on time what the software tells them, there won’t be any penalties or interest. The accounting software will get it close enough for them during the year, reducing the likelihood of an unexpected bill at the end of the year.
They’ve got more time to work with their tax agent. She’s been helping them revise their business model, so one wet summer can’t soak their business.
Mike spends less time on tax now and more time on marketing. He got Sally’s top-tots designs into an upmarket London store. Princess Charlotte has been spotted in one, and sales are going through the roof!
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