The most significant change to the New Zealand tax system in years was announced today by Prime Minister John Key. This change is a new way of calculating Provisional Tax liability for small businesses and the self-employed.
What does this mean? This new method, called the Accounting Income Method (AIM), makes provisional taxes easier to administer, matches payments with cashflow and remove the threats of interest and penalties when businesses get it wrong.
Provisional Tax and how it works
The current provisional tax system was designed at a time when considerable effort was required to work out a business’s financial position. To minimise the burden of calculating income, Provisional Tax was designed to be paid in advance two or three times a year. One drawback of this is that tax is paid before a business knows what its actual taxable income is going to be. Those tax payments have a major impact on cashflow as there is no flexibility about timing of payments. And if things don’t go according to plan, changing the payments is time consuming too.
With the advent of cloud accounting solutions such as Xero, financial information is up-to-date and at your fingertips. AIM uses that power to enable the calculation of provisional tax liabilities from a business’s latest available financial information. The calculation process will be built into the business’ GST return preparation process as much as possible to minimise the time burden on small businesses.
What AIM would mean for small businesses
Provisional tax payments will be made six times a year at the same time as GST payments. This saves time and effort. The payment is based on the results actually achieved in that tax year, matching payments to cashflows as closely as possible.
AIM will be great for startups that have a tenuous future because they only pay tax on results they have achieved. AIM should also work well for businesses that are seasonal because the payment of taxes adjusts to the season too.
AIM will be responsive to changing business conditions too. If economic conditions tighten and a business’ tax liability drops, Inland Revenue will refund overpayments, in much the same way that GST refunds are handled.
Instrumental in achieving reductions in compliance costs for small businesses, Xero has worked closely with Inland Revenue policy teams and industry to develop the framework being released for consultation.
Later today Xero launches Signals, an initiative drawing on insights from real-life data which small business owners can use to make clearer business decisions and plan for the future. These insights show that that businesses who have advisers like a bookkeeper or an accountant, do better. AIM will give advisers six opportunities to talk to their clients about their business, instead of three. This increased contact should lead to stronger relationships and better business outcomes.