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Transforming Inland Revenue Te Whakahou i te Tari Taake

The accounting income method (AIM)

A transcript for "the accounting income method (AIM)" video.

Visual:

The title screen with Inland Revenue logo and title ‘AIM - Accounting Income Method for Provisional Tax’ appear on screen. Transition to screen with computer monitor slides in from the right.

Audio:

The Accounting Income Method, or AIM, is a new option available from April 2018 for businesses with turnover of less than $5 million to calculate provisional tax.


Visual:

‘< $5 million’ is on screen and then circles roll in with logos ‘APS’, ‘myob’ and ‘Xero’.

Audio:

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.


Visual:

Transition to show ‘Sally’ standing in her store ‘Sally’s Swimwear’. Swimwear appears on the screen and hanging on walls. Bubble pops up showing ‘Joanne’ and then words ‘AIM’.

Audio:

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 is a bad summer, business can suffer. Sally has a tax agent, Joanne, who helps her with provisional tax.


Visual:

‘Tick’ pulses in bubble. Transition to grey background with computer monitor sliding in from bottom. Monitor shows a ‘profit and loss’ graph. The graph shows a line graph and highlights the peaks and troughs.

Audio:

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%.

AIM is different in that it calculates the provisional tax due based on the actual income on a year to date basis.


Visual:

Transition to a new graph showing the ‘cash flow’ line and ‘AIM payments’ tracking the same. Bubble with ‘AIM CAPABLE’ pops up. Transition to new screen with ‘Joanne’ in bubble in the top left and ‘clock’ ticking around to ‘30mins’ in the top right corner.

Audio:

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 have done this herself but she was busy and they agreed that Joanne would do it on her behalf, which she did at the start of the year.


Visual:

Title ‘Mapping Ledger for Statement of Activity (IR 10 Fields)’ pulses and then fields drop down on screen. ‘Arrows’ point to field ‘Gross Income Sales’.

Audio:

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.


Visual:

Transition to ‘Accounting adjustments for AIM’ screen. ‘Cursor’ toggles buttons to show adjustments can be made.

Audio:

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.


Visual:

‘Mobile phone’ icon come up in bubble in top left corner. ‘Cursor’ toggles buttons to show adjustments can be made and ‘$1500.00’ is typed into field. ‘Setup a rule’ bubble slides out from ‘Joanne’ in bubble in top left corner. ‘Tick’ bubble pops up.

Audio:

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.


Visual:

Screen ‘scrolls’ down and bubble with ‘Debtors & Creditors’ pops up. ‘Cursor’ moves to button and toggles x 2. ‘$1000’ is typed into field.

Audio:

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.


Visual:

‘Scroll’ down too show graph showing the ‘cash flow’ line and ‘AIM payments’ tracking the same. Transition to new screen with icon of ‘Sally’ on the left and ‘Sally’s Swimwear’ business on the right. ‘$’ are moving from the business to Sally. ‘Joanne’ bubble pops up by ‘Sally’.

Audio:

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.


Visual:

Inland Revenue logo appears above at top of screen. ‘$’ move from ‘Sally’s Swimwear’ to ‘Inland Revenue’.

Audio:

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.


Visual:

‘Arrow’ point from ‘Sally’s Swimwear’ to ‘Sally’. Transition to screen with ‘< $5 million’. ‘Circle’ with ‘AIM’ rolls on from right. ‘Tick’ pulses on screen. ‘Scroll’ to show screen for ‘ Mock Accounting calculation for AIM’. ‘Cursor’ moves to button and toggles x 2.

Audio:

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, 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.


Visual:

Bubble pops up with ‘year to date profit’. ‘Scroll’ to ‘Statement of Activity’ and pulse. ‘Clock’ pops up in right corner and ticks to ‘5mins’.

Audio:

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.


Visual:

‘Cursor’ moves and fills in ‘Statement of Activity’. ‘AIM’ bubble pops up. Icon of ‘form’ replaces words ‘AIM’. ‘Calculator’ replaces ‘form’.

Audio:

The statement of activity includes the current IR10 form along with 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.


Visual:

Snow falls from top of screen. ‘Shareholder salary’ reduces in value. ‘Circles’ roll in from right with ‘IR’, ‘transfer’ and ‘bank icon’. Transition to new screen showing ‘invoice’.

Audio:

When winter comes later in the year Sally’s business struggles and her statement of activity shows she has overpaid her year to date provisional tax.

She has a choice to hold the funds at Inland Revenue to offset against future tax bills, to transfer it to another tax account, or to get it refunded immediately to her bank account. A refund at this time could provide much needed cash.

Sally also found an invoice that she’d forgotten about in the previous period.


Visual:

Transition to ‘Joanne’ and ‘Tax Return. Both slide of bottom of screen. Bubbles with ‘$90,000’, ‘$80,000’ and $10,000’ drop in from top of screen. All three pulse as words are said. Transition to ‘Joanne’ - ‘Tax Return’ - ‘Residual Income Tax, Provisional Tax Paid’ - ‘Balance to pay’. Bubble with ‘No penalties or interest’ pops up.

Audio:

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.

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 for the year. It has paid $80,000 through provisional tax. So there is a balance of $10,000 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.


Visual:

All things on screen slide out of frame. Bubble with ‘AIM’ pops up with ‘$’ left and right showing ‘$’ getting smaller. Transition to screen on desk with title ‘Accounting Income Method’ at top.

Audio:

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 will be available from April 2018 through APS, MYOB and XERO. Check with your software provider to see if it’s going to be available to you.


Visual:

Website types on screen. Transition to teal screen with Inland Revenue logo.

Audio:

To learn more about AIM go to www.ird.govt.nz/AIM.

We recommend that businesses talk to their tax agent or accountant to discuss if it might suit them.