Provisional Tax - No Free Ride

Rumours have been circulating that business owners will no longer have to pay provisional tax. Sadly this is not the case, however the IRD is looking at ways to make it “easier” for taxpayers to pay provisional tax (but this will not ease the pain).

The IRD’s ultimate aim is to have tax paid as income is earned. The current provisional tax regime achieves this provided that business income is fairly consistent between different income years. The current regime can be problematic when a significant chunk of income is earned in the 2nd half of the year (meaning provisional tax is paid before the income is earned), when the current years earnings is significantly less than the prior year (too much provisional tax has been paid) or perhaps the current years earnings is significantly higher (and not enough provisional tax will have been paid resulting in a higher terminal tax bill in April as well as additional provisional tax to pay around the same time).

The Accounting Income Method (AIM) is an option which IRD is looking at and would allow businesses to pay provisional tax based on the current year earnings as calculated by their accounting software. Tax would be paid 2 monthly along with the GST payment. The option would be available to businesses with annual sales/turnover up to $5,000,000 from 1 April 2018.

The IRD is currently assessing how this option could work. For this method to work correctly taxpayers would need to ensure that their accounting system is accurate (the purchase of a motor vehicle coded to “Motor Vehicle expenses” would not meet this test). IRD are considering what information they may require to confirm any tax payment, as well as what penalties may apply if a tax payer does not take “reasonable care”, so that there is a penalty if a taxpayer is manipulating or not accurately recording their financial results.