From 1 April 2018, Independent Professionals (IPros) can benefit from the significant changes that the IRD (Inland Revenue) has made to the provisional tax regime. The accounting income method (AIM) is essentially a “pay-as-you-go” provisional tax method that will make provisional tax much simpler for independent contractors and assist in maximising contractors’ cash-flow.
What is AIM and who can use it
AIM is a new provisional tax method that small businesses, and self-employed individuals, with a turnover of less than $5million, can elect to use from April 2018. This means that the majority of independent contractors will be eligible to use the AIM method.
You don’t need to be GST registered to use AIM but you will need to be using accounting software that has AIM functionality. Xero and MYOB both have the functionality and capability for the financial year starting 1 April 2018.
AIM will be most useful for independent contractors who:
• Are new to contracting
• Find it difficult to know how much provisional tax to put aside
• Have fluctuations in their income throughout the year
• Find it hard to forecast their taxable profit
• Use accounting software, or want to start using accounting software
How does AIM work
AIM uses your approved accounting software, such as Xero and MYOB, to work out what your provisional tax payments will be.
Taxpayers will be required to file a “statement of activity” every two months with the IRD (or every one month, if you file your GST returns on a monthly basis). This statement of activity will be prepared and filed directly within your accounting software. Your software will also have the functionality to work out if tax-adjustments are required to be made with your activity report.
Once you’ve prepared your statement of activity, your software will automatically calculate your provisional tax payment based on:
• Your company tax rate, or
• Your individual tax rate
Once you’ve opted in to AIM, you’ll only pay provisional tax when you make a profit. If you have a drop in profit, which means you’ve overpaid income tax, then you’d be able to claim a refund immediately rather than waiting until the end of the tax year. The IRD aims to process any refund within 48 hours of the activity report being received.
If your agency is deducting withholding tax with each invoice, it’s important that this is included with each activity report. We recommend that contractors apply for a special tax code certificate so that they have more control over what tax amounts are being deducted.
The benefits of AIM for independent contractors
The key features that contractors can benefit from:
• Assists with managing cash flow
• Simple to file from your accounting software
• Reduces exposure to penalties and interest
• Reduces reliance on forecasted income
• Pay tax only as you make a profit
The AIM method is a simple and effective solution that takes a lot of the guesswork out of tax forecasting for independent contractors. Contractors only need to pay tax on profits as they earn them, rather than having to forecast out and estimate for the whole tax year.
The IRD has also advised that you won’t be liable for any use of money interest which further reduces risks and makes the AIM method very attractive for contractors.
Getting set up to use AIM
Independent contractors can elect to use AIM, for the 31 March 2019 tax year, from 1 April 2018.
There’s nothing you need to complete or sign to say that you’re using AIM. You’ll just need to make sure that your first two-monthly activity report is completed before 28 June, which is when the first provisional tax payment is due. This will indicate to the IRD that you are using the AIM method for this financial year. Please note that once you’re using the AIM method, you won’t be able to opt out of this until the next financial year.
To use the AIM method, you’ll need to file it through a tax agent or approved advisory – the AIM functionality in your Xero account won’t be available to you without it.
Entity Business and Taxation
Our Entity Business and Taxation team are experts in both provisional tax and the AIM method. We use systems that have AIM functionality and fully support the AIM method. For contractors looking to adopt AIM, contact our EBAT team for more information.
Entity Business and Taxation (EBAT) is a division of Entity Solutions Group. Our team is made up of chartered accountants specialising in tax for independent contractors in New Zealand. We can assist you with tax, insurances and getting the most out of being an independent contractor in New Zealand. Check out our tailored packages for more information around the services we provide to independent contractors.