For most businesses in NZ (excluding Government) 31st March marks the end of the Financial Year. P&L is calculated, investment and depreciation is adjusted and the resulting NPBT figure (Net Profit before Tax) is the slice of the pie the IRD takes a bite out of.
Until now the main method of calculating ‘that bite’ has been a mix of actual data and a healthy dose of forecasting/crystal ball gazing. In my experience as Business Advisor and a business owner myself I know this can be problematic when revenue stream fluctuates – because the calculation is a double edged sword… overpay your tax and impinge on your cashflow until the refunds come out or underpay your tax and pay a penalty. It’s a headache.
However – with the widespread implementation of real time accounting systems (like Xero, MYOB and Reckon) and access to accurate reporting the need for guesswork is over. For the first time small businesses (with a turnover of less than $5m) can pay their FYE 19 Provisional Tax based on real figures calculated in a similar way to PAYE using AIM (Accounting income method)*. Like all tools in business – it has its pros and cons.
Pros…
- Peace of mind. By the end of the next financial year you’ll know you’ve already paid the correct tax based on your actual accounts. No tax-time stress!
- Smoother cashflow. With your tax being paid either monthly or two monthly – these regular payments will be smaller and not require a large chunk of cash to be available at any given time
- Lower accounting bills. Many small businesses only use their accountants to check, tidy and file the year end accounts – including calculating your tax bill. If you are using an applicable accounting system with robust processes and enough detail to generate accurate filings it is highly likely your accounts will be clean and simple. Less time spent sorting them out means lower accounting bills
Cons…
- Double Whammy payment. Probably the biggest concern for anyone looking to change from estimated to AIM provisional tax is the timing of the first payment. The last provisional tax payment for FYE 18 is due by 7th May … which is likely to be a lump sum payment of 1/3 of your yearly tax bill. In the same month (or June if you opt to pay two-monthly) the first of the AIM calculated instalments will also be due – which could affect cashflow if the funds are not readily available
- Less retained operating cashflow. One of the upsides of paying provisional tax using the estimation system is that cash stays in your business for longer. The same amount still needs to be paid – but as the payments are ‘lumped’ together it’s the equivalent of having an interest free loan on your tax bill until the next instalment is due
- You can’t miss payments. Penalties and interest are applied to late payments – and if you miss payments more than twice you will not be able to use the AIM system any more
Personally I like the idea of being totally on top of my tax payments. I like the idea of not having to schedule, remember and manage my cashflow to allow for the three lump sum payments… so I will be signing up to the AIM method of paying my provisional tax.
At the end of the day though it’s a personal choice each small business owner has to make depending on what suits their specific set of circumstances.
So when ‘The tax man cometh’ – how will you respond?
*All the information you need about the new Tax Payment method can be found on the IRD’s website: HERE