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Technical tax area Ngā tūmomo whakataunga me ngā aratohu

Determination A3: Tax rates for AIM

Scope

  1. Under the Accounting Income Method (AIM), taxpayers can calculate their provisional tax payments by using accounting software if that software is in accordance with determinations made under section 91AAX of the Tax Administration Act 1994.

  2. An AIM-capable accounting system calculates provisional tax using year-to-date accounting income and expenditure adjusted for tax purposes (if required). The purpose of this determination is to detail the applicable tax rate to apply to year-to-date net positive accounting income and expenditure, after tax adjustments, for an AIM instalment period.

Application

This determination applies for the 2018-19 and later income years.

Tax rates

  1. For a person, an AIM-capable accounting system must apply the applicable tax rate in subclause (2) or (3) to the person’s net positive accounting income and expenditure year-to-date, after tax adjustments, to calculate their current instalment period payment, as provided by subclause (7).

  2. If the person is a company that schedule 1, part A, clause 2 of the Income Tax Act 2017 applies to for the tax year to which the current instalment period relates, the tax rate for the instalment period is the basic rate provided by schedule 1, part A, clause 2 of that Act.

  3. If the person is a person that schedule 1, part A, clause 1 applies to for the tax year to which the current instalment period relates, the tax rate for the instalment period is given by the following formula:

    full-year tax ÷ full-year net positive amount.

  4. In the formula—

    full-year tax is the amount of tax a person would have for the tax year related to the current instalment period from applying table 1 of schedule 1, part A of the Income Tax Act 2007 to the full-year net positive amount:

    full-year net positive amount is the amount given by the formula in subclause (6).

  5. For the purposes of calculating the full-year net positive amount, the formula is—

    annual instalments x year-to-date net positive amount ÷ instalments year-to-date.

  6. In the formula—

    annual instalments is the number of instalment periods for the relevant tax year:

    year-to-date net positive amount is the net positive accounting income and expenditure, after tax adjustments, for instalment periods, including the current instalment period, year-to-date:

    instalments year-to-date is the number of instalment periods, including the current instalment period, year-to-date.

  7. For the purposes of calculating the current instalment period payment, the formula is—

    year-to-date net positive amount x tax rate - (payments + refunds).

  8. In the formula—

    payments is the amount of provisional tax paid for the income year, year-to-date:

    refunds is the amount of provisional tax refunded for the income year, year-to-date:

    tax rate is the tax rate provided by subclause (2) or (3):

    year-to-date net positive amount is the net positive accounting income and expenditure, after tax adjustments, for instalment periods, including the current instalment period, year-to-date.

Example

Emma is a sole trader who uses AIM to calculate her provisional tax liability. She pays provisional tax in 6 instalments during the year.

Emma is in her 3rd instalment period, August/September 2018.

For the AIM instalment periods April/May 2018, June/July and August/September 2018 Emma has the following net positive accounting income (after accounting expenditure and tax adjustments):

AIM Instalment Period Net positive accounting income ($)
April/May 2018 5,000
June/July 2018 7,510
August/September 2018 14,250
Total 26,760

At the end of the June/July period, Emma has made AIM payments totalling $2,500.

The full-year net positive amount for the purposes of clause 3(4) of this determination is calculated using the formula in clause 3(5)—

annual instalments x year-to-date net positive amount ÷ instalments year-to-date.

For Emma, the full-year net positive amount is—

6 x 26,760 ÷ 3 = 53,520

Having calculated the full-year net positive amount the full-year tax can be calculated. For Emma the full-year tax is—

Income tax rate Income Tax
Income up to $14,000, taxed at 10.5% $14,000 $1,470
Income over $14,001 and up to $48,000, taxed at 17.5% $34,000 $5,950
Income over $48,001 and up to $70,000, taxed at 30% $5,520 $1,656
Remaining income $70,001 onwards, taxed at 33% $0 $0
Total $53,520 $9,076

The full year-tax for Emma therefore is $9,076.

The tax rate applicable to the net positive accounting income for the instalment period is calculated using the formula in clause 3(3)—

full-year tax ÷ full-year net positive amount.

The tax rate for Emma therefore is calculated in the following way—

9,076 ÷ 53,520 = 16.9581%

Emma’s tax rate therefore is 16.96% for the current instalment period.

Emma applies this rate, on a year-to-date basis, to calculate her payment due for the current August/September 2018, using the formula in clause 3(7)—

year-to-date net positive amount × tax rate

26,760 × 0.1696 = 4,538

Emma has paid $2,500 year to date and received no refunds year to date, so her payment for August/September 2018 is—

4,538 - (2,500 + 0) = 2,039

Tax adjustments: manual and automatic

A tax adjustment under this determination must be made by—

  1. the user of the accounting software, manually:
  2. the accounting software, automatically:
  3. any other means, as appropriate.

Tax adjustments: errors and oversights in previous instalment period

An error or oversight affecting accounting income or expenditure (including income or expenditure adjusted by a determination) for an instalment period in an income year must be corrected by making a tax adjustment in the next instalment period after the one in which the error or oversight is identified.

Interpretation

  1. In this notice, unless the context otherwise requires,—
    instalment period, for a person, means the 2-monthly or monthly period given by schedule 3, part AB of the Income Tax Act 2007 for the applicable instalment date.
  2. Any word or term that is defined in the Income Tax Act 2007 and the Tax Administration Act 1994 and used, but not defined, in this determination has the same meaning as in those Acts.
  3. Examples used in this determination are included in this determination only as interpretational aids. If there is conflict between an interpretational aid and a provision of this determination, the provision prevails.

This determination is made by me, acting under delegated authority from the Commissioner of Inland Revenue under section 7 of the Tax Administration Act 1994.

This determination is signed on the 10th day of October 2017.

Keith Taylor

Manager, PAS