The title screen with Inland Revenue | Te Tari Taake logo and title AIM - ACCOUNTING INCOME METHOD FOR PROVISIONAL TAX are shown.
Easy listening style music plays softly in the background for the entire video.
The Accounting Income Method, or AIM, is an alternative provisional tax option for businesses with turnover of less than 5 million dollars, to calculate provisional tax.
Less than $5 million is on screen, then circles roll in with logos for the software providers APS, myob, and Xero.
This video is a case study, which will explain how AIM works and how it might look.
AIM is delivered through accounting software, not by Inland Revenue. So how it actually looks will be designed by your software provider.
Sally is shown standing in her store Sally’s Swimwear. Swimwear appears hanging on the wall. A circle pops up showing Joanne and then word AIM.
Let’s meet Sally.
She designs and makes a range of swimwear, which are sold mostly online.
Every so often, one of the designs is featured in a fashion magazine, and this provides a big boost.
But if there’s a bad summer, business can suffer.
Sally has a tax agent, Joanne, who helps her with provisional tax.
A profit and loss (P&L) line graph appears, and highlights the peaks and troughs in Sally’s business. Payments are made when there is a profit, no payment is made when there’s a loss.
Joanne thinks that AIM will work well for Sally’s company because of fluctuating seasonal sales, and the fact that her accounts are pretty up to date.
Last year Sally’s Swimwear used the standard provisional tax option.
This meant that there were three fixed instalments, which were based on the previous years’ results, plus 5 percent.
AIM is different in that it calculates the provisional tax due based on the actual income on a year to date basis.
A new line graph appears showing profits over time. Cash flow line and AIM payments are projected tracking the same line. A circle with AIM CAPABLE pops up.
A clock appears showing it takes about 30 mins to complete the AIM setup.
All the work is done through accounting software that is AIM-capable.
Some setup is still required, but the software will guide you through it.
Sally could’ve done this herself, but she was busy, and they agreed that Joanne would do it on her behalf.
Joanne did this at the start of the year, but she can start using AIM anytime during the year.
Title Mapping Ledger for Statement of Activity (IR 10 Fields) is shown, then the following fields appear under the title.
- 101 Store sales.
- 102 Online sales.
- 103 Market day sales.
Arrows point from each filed to a new filed Gross Income Sales.
The first step Joanne does, is map individual ledger accounts, so that the software can produce a statement of activity.
The software asks Joanne how it should treat a few adjustments during the year.
These adjustments will help the software to more accurately calculate the provisional tax.
There are some basic settings and the ability to make manual adjustments if needed.
An Accounting adjustments for AIM screen appears with the following basic settings.
- Depreciation - Automatically calculate depreciation (YES / NO).
- Closing inventory – Same as last year (YES / NO).
- Closing inventory – Perpetual inventory system input (YES / NO).
- Private expenditure – User input required (YES / NO).
- Private expenditure – User input required text entry field.
For example, with depreciation, Sally’s company has an up-to-date asset register that goes through the P&L so Joanne has elected to use that info.
But, if Sally recorded the depreciation separately, she could do a manual entry.
For inventory, Sally doesn’t have a perpetual inventory system, so she’s going to use the information from her P&L.
Again it would also be possible to enter it manually.
A mobile phone icon comes up in circle, then a new circle splits from that showing Set up a rule. $1500.00 is entered into the Private expenditure – User input required text entry field.
Sally’s using a mobile phone for personal use that’s under the business plan.
Since this is a personal cost, not a business expense, Joanne needs to make a private expenditure adjustment.
Joanne sets up a rule in the software so it automatically codes her portion of the cellphone costs as private expenditure next time.
No adjustment is then required as it would be accounted for correctly, and it makes the next AIM statement even quicker.
A second Accounting adjustments for AIM screen appears with the following basic settings.
- Debtors – Include Debtors from ledger? (YES / NO).
- Creditors – Include Creditors from ledger? (YES / NO).
- Creditors – User input required text entry field.
- Losses from prior year? – As assesses – sourced from Inland Revenue text entry field.
- Provisions – Provision for doubtful debts text entry field.
- Provisions – Provision for Shareholder salary text entry field.
- Provisions – Tax paid on Shareholder Salary to Inland Revenue? (YES / NO).
- $1000 is entered into the Creditors – User input required text entry field.
Sally’s company uses the invoice basis for GST so Joanne will include debtors and creditors in the AIM adjustments.
If you’re using the payments basis, or a hybrid, you can choose to include them if you want.
You will be able to make a manual adjustment if they are not in your ledger.
If she had losses from a previous year, which Inland Revenue confirmed, AIM can take account of them here to reduce the AIM provisional tax payments due.
A new line graph appears showing profits over time. Cash flow line and AIM payments are projected tracking the same line.
Sally and SALLY’S SWIMWEAR appears in separate circles with dollar signs moving from SALLY’S SWIMWEAR to Sally indicating a shareholder’s salary is being paid.
AIM requires you to add provisions back.
Joanne is making sure they are set up in the software at the start of the year, so that the provisions are added back automatically.
This will help the provisional tax be accurate throughout the year, rather than just at the end.
Like many small businesses, Sally wants to take a shareholders salary.
AIM can simplify the provisional tax approach to this, however, there are a number of options available.
Sally isn’t sure, and asks Joanne for advice on the best way to handle it.
The Inland Revenue | Te Tari Taake logo appears. The dollar signs then move from SALLY’S SWIMWEAR to the Inland Revenue | Te Tari Taake logo indicating a wage with PAYE is being paid
instead of a shareholder salary.
Joanne advises Sally, that if the tax relating to the salary is paid to Inland Revenue by the company, a deduction for the salary can be taken.
This would reduce the tax payable by Sally’s company.
If the company does this as an agent for Sally it may mean that she has no provisional tax liability.
Less than $5 million appears is shown, this scrolls off screen to the left and is replaced by a circle with AIM inside it.
Mock Accounting calculation for AIM is shown with the following fields.
- Tax Rate – Individual (YES / NO).
- Turnover under $5m (YES / NO).
- Notify Inland Revenue to keep using AIM? (YES / NO).
- AIM YTD Profit (after adjustments) text entry field with $12,500.00 entered.
- AIM paid (confirmed with Inland Revenue) text entry filed with $14,000.00 entered.
- AIM Refund due text entry field with $4,000.00 entered.
- Instructions – HOLD text entry field with $1,000.00 entered.
- Instructions – Refund text entry field with $1,000.00 entered.
If a deduction isn’t taken, any overpayments of tax made by the company can be transferred to reduce Sally’s provisional tax liabilities.
Sally’s company turnover is below 5 million dollars, so she can use AIM.
When her business grows and she goes over that threshold, she can choose to stay in AIM.
Now that it’s set up, Sally doesn’t need to review the adjustments every time there is a payment.
Though Joanne and Sally have the option of keeping an eye on it and tweaking things if needed.
A Statement of Activity example is shown with the heading IR10 information
and the following fields.
- IRD Number.
- Instalment date.
- Return Period.
- Current AIM Payment Calculation.
- Year to date AIM liability.
- Gross income from sales and/or services.
- Opening Stock (incl work in progress).
- Closing stock (incl work in progress).
During the year, the software calculates the year-to-date profit based on actual cash flows and all the AIM adjustments.
When Sally does her GST, a statement of activity, like the example shown here, will be produced and sent to Inland Revenue by a simple click of a button in her software package.
It’s not a return and it doesn’t result in an assessment.
The Statement of Activity is filled in when a circle appears over it with AIM in the middle. An icon of a form replaces AIM, a calculator then replaces the form.
The statement of activity includes AIM adjustments and payment or refund instructions.
It’s used to show Inland Revenue that there is a robust calculation behind the AIM amount.
It will also help improve AIM in the future.
Sally or Joanne can review the information before it’s sent to Inland Revenue.
A Statement of Activity is shown with the heading IR10 information and the following fields.
- Accounting Profit 12000.00
- Private expenditure 200.00
- Trading stock 3000.00
- Depreciation (300.00)
- Debtors 500.00
- Creditors (1000.00)
- Shareholder salary (8000.00)
Shareholder salary reduces to (3000.00) and Accounting Profit reduces to 7000.00.
When winter comes later in the year Sally’s business struggles and her statement of activity shows she has overpaid her year-to-date liability.
Sally also found an invoice that she’d forgotten about in the previous period.
This isn’t a problem in AIM and she doesn’t have to re-file.
Sally can put it in now, and the software will adjust her year-to-date position for her next instalment accordingly.
Three circles with $90,000, $80,000, and $10,000 drop appear.
A simple flowchart is displayed showing the following steps.
- Joanne gets the business records.
- Joanne completes the business tax return.
- The residual income tax is compared to the provisional tax paid.
- The remaining balance is left to pay by Sally.
No penalties or interest appears above the Balance to pay (Step 4).
At the end of the tax year Joanne will prepare the tax return and file it.
Sally’s Swimwear has a residual income tax liability of 90,000 dollars for the year.
It has paid 80,000 dollars through provisional tax.
So there is a balance of 10,000 dollars to pay.
Because this has all gone through AIM, and she’s paid the amounts that the software told her to pay during the year, there are no penalties or use of money interest to pay.
Sally can just pay the outstanding amount on time and in full, and carry on with AIM.
A circle with AIM appears with a dollar symbol on the left and 3 dollar symbols appear on the right getting smaller, indicating how AIM helps keep bills down over time.
Joanne and Sally will talk about the things they can do differently next year to make sure Sally’s provisional tax is even more accurate.
AIM will improve over time so the gap between what Sally has to pay during the year, and the year-end tax return, gets smaller and smaller.
AIM is available through APS, MYOB and XERO.
Check with your software provider to see if it’s going to be available to you.
A computer screen is showing with Accounting Income Method at the top and www.ird.govt.nz/AIM below it.
The video ends with the Inland Revenue | Te Tari Taake logo.
To learn more about AIM go to ird.govt.nz/AIM.
We recommend that businesses talk to their tax agent or accountant to discuss if it might suit them.