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Upcoming Changes to the Provisional Tax Rules

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The Taxation (Business Tax, Exchange of Information, and Remedial Matters) Act 2017 introduces significant changes to the way that provisional tax may be paid.  The changes to provisional tax payments will be effective from 1 April 2018.  The Act also introduces some business simplification matters.

The calculation and payment of provisional tax can be significant in terms of compliance requirements.  In order to combat this, and with the aim of reducing both compliance pressure and costs, the IRD has introduced a new method that can be used to calculate and pay their provisional tax by some smaller businesses.  This new method is called the accounting income method (AIM).

Where a smaller taxpayer chooses to use the AIM method for calculating and paying provisional tax, certain criteria must be met in order for its use to be permitted.  In order for AIM to be able to be used, the tax payer must have an annual gross income of $5m or less and be using an allowed accounting software system.

An appropriate accounting software system will need to be up to date in terms of tax law for each accounting year and will meet the IRD’s standards for an accounting system.  The IRD will approve an accounting system where it meets the IRD’s standards in terms of generating financial reports, calculating tax liabilities electronically communicating prescribed information with the IRD.

Where AIM is elected to be used the accounting system will calculate the tax payable for each instalment based on the information that has been entered into the accounting system.  Therefore, it will become more important then ever that correct information is entered into the accounting system during the year and that you are not making significant year end adjustments to the data that was entered throughout the income year.    Where taxpayers elect to use the AIM method of calculating and paying provisional tax, the payment dates will be aligned with their GST filing dates.

Taxpayers that elect to use AIM to calculate their provisional tax will not be subject to use of money interest in respect of provisional tax payments.  However, in order to use AIM a taxpayer will be required to meet minimum levels of reasonable care and the IRD may impose penalties if this requirement is not met.  Further, taxpayers using AIM will be required to provide detailed financial information to the IRD on a more frequent basis that is required under the other methods available for calculating and paying provisional tax.

As you will note from the above, there are several factors to consider in deciding whether AIM is right for you and your business.  We will be in touch to discuss this further with each of our clients where applicable closer to 1 April 2018.