Small business owners in NZ: What is AIM provisional tax & should you opt in?

What is AIM provisional tax?

The AIM provisional tax regime was introduced on 1 April 2018 to simplify provisional tax for small businesses in New Zealand.

Since its introduction, the regime has worked well for all sorts of NZ businesses. Sole traders, new limited companies, growing companies, and companies going through an investment phase have all benefited from the system. The feedback from businesses that have made the switch has been consistently positive.

How does AIM work exactly?

Under AIM, you pay provisional tax in line with the profit made throughout the year.

• If you return GST monthly, you will pay provisional tax on a monthly basis.
• If you return GST every two months, you will pay provisional tax every two months.
• If you return GST half-yearly or are not GST registered, you will also pay provisional tax every two months.

Please note that you do still need to lodge a tax return at the end of the year. AIM does not replace that. However, your annual return will take into account the provisional tax you have already paid throughout the year, just as it does under the standard method, and will return any overpaid tax when your return is lodged.

What does this really mean for your business?

If your business has a two-month period where you make a profit, you will pay provisional tax for that two-month period based on your applicable tax rate.

If you make a loss over a two-month period, you will not pay any provisional tax, and you may be eligible for a refund.

The profit calculation is made on a year-to-date basis. So if you have a period where the two months made the current year-to-date position worse than it was two months ago, you are eligible for a provisional tax refund. You can claim this refund straight away or roll it over to the next period. That is up to you.

Common benefits of AIM

The most common benefits our clients have experienced with AIM are:

• More frequent payments enable better cashflow management
• Tax is easier to estimate because it is based on what you are actually earning
• Less chance of penalties and interest at tax time

Who is eligible for AIM?

To use AIM, you need to:

• Be a sole trader or a limited company
• Have a turnover of less than $5 million per annum
• Be using IRD-approved software capable of carrying out the AIM calculations, such as Xero

AIM works on a self-certification model. You set it up through your software, which will confirm your eligibility as part of the process. You do not need to register separately with IRD. Simply file your first statement of activity through your software and IRD will know you have chosen AIM.

So is it worth opting in?

In our view, yes, for the right business. AIM removes the guesswork from provisional tax. You pay based on what you have actually earned, not on what you earned last year. For businesses with variable income or seasonal cashflow, that can make a real difference.

That said, AIM works best when your accounting records are kept up to date throughout the year. If your books are only tidied up at year end, you will not get the full benefit of the system and the payment calculations will not be reliable.

We would always recommend having your finance team across your AIM filings, not because it is required, but because regular oversight of your numbers is good practice regardless. You want someone checking that the calculations reflect what is actually happening in your business.

What next?

You can join AIM at any point during the financial year. There is no set window, and once you are in, you simply continue from year to year unless you choose to switch back.

If you would like to talk through whether AIM is the right fit for your business, we are happy to work through it with you.