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Technical tax area Ngā tūmomo whakataunga me ngā aratohu

Determination A9: Tax adjustments for provisions under 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 tax adjustment to provisions to calculate year-to-date net positive accounting income and expenditure, after tax adjustments, for an AIM instalment period.

  3. A provision, as a general principle, will not meet the test of being incurred and therefore will not be deductible for tax purposes.

  4. Where accounting expenditure includes a provision, a tax adjustment is necessary to exclude that expenditure.

  5. However a provision is permitted if it relates to expenditure on employment income for a shareholder of a company. A deduction for accounting expenditure is limited to the extent to which the company pays tax as an agent of the shareholder in relation to the provision for shareholder employment income.

Application

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

Tax adjustments: choices and adjustments

  1. This clause requires tax adjustments to the extent to which a person’s accounting income and expenditure does not already accord with the adjustments described in this clause.

  2. For a person, for an instalment period, accounting expenditure must not include an amount on account of a provision.

  3. Despite subclause (2), an instalment period’s accounting expenditure may include an amount on account of a provision to the extent to which the person is a company and the provision relates to expenditure on employment income for a shareholder-employee of the company. The amount of the provision allowed as an adjustment to increase accounting expenditure for the instalment period is the lesser of—
     
    1. the provision; and

    2. the amount of tax paid during the instalment period as agent for the shareholder-employee divided by the rate given by subclause (4).

  4. The tax rate for the purposes of subclause (3)(b) is given by the following formula—

    full year tax ÷ full-year income.

  5. In the formula—

    full-year tax is the amount of tax the shareholder-employee 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 income:

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

  6. For the purposes of calculating the full-year income, the formula is—

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

  7. In the formula—

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

    year-to-date net positive amount is the total amount of provisions allowed under this determination for the shareholder-employee 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.

Example:

Oliver’s Apples Limited (OAL) uses AIM to calculate its provisional tax payments which it pays in 6 instalments during the year.

OAL has 2 shareholder’s Oliver and Emily.

For the first AIM-instalment period April/May 2018-19, OAL has net accounting income before shareholder remuneration of $20,000.

It is intended that for the AIM-instalment period April/May 2018-19 OAL will make provisions for shareholder remuneration of $11,500 for Oliver and $8,500 for Emily that form part of the accounting expenditure for the instalment period. It is also intended that the tax liability relating to both shareholders’ remuneration will be paid by OAL as agent for each shareholder.

A person’s full-year income amount is calculated using the formula in clause 3(6).

For Oliver the full-year income is—

6 x 11,500 ÷ 1 = 69,000

For Emily the full-year income is—

6 x 8,500 ÷ 1 = 51,000

The full-year tax in clause 3(5) of this determination is calculated by applying table 1 of schedule 1, part A of the Income Tax Act 2007 to the full-year income amount.

For Oliver the full-year tax amount 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% $21,000 $6,300
Remaining income $70,001 onwards, taxed at 33% $0 $0
Total $69,000 $13,720

Based on a full-year tax amount for Oliver of $13,720 OAL makes a decision to make a payment as agent for Oliver of $2,286.67 ($13,720 ÷ 6 = $2,286.67).

For Emily the full-year tax amount 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% $3,000 $900
Remaining income $70,001 onwards, taxed at 33% $0 $0
Total $51,000 $8,320

Based on a full-year tax amount for Emily of $8,320, OAL makes a decision to make a payment as agent for Emily of $1,386.67 ($8,320 ÷ 6 = $1,386.67).

Having calculated the full-year tax and full-year income for each shareholder the tax rate for the purposes of clause 3(3)(b) of this determination can be calculated.

The formula in clause 3(4) provides that the tax rate is calculated by dividing a person’s full-year tax by their full-year income.

For Oliver the rate for the current instalment period is calculated in the following way:

13, 720 ÷ 69,000 = 0.198841.

For Emily the rate for the current instalment period is calculated in the following way:

8,320 ÷ 51,000 = 0.163137.

Under clause 3(3), OAL’s accounting expenditure for the current instalment period is increased by the lesser of—

  1. the provision, and

  2. the amount of tax paid during the instalment period as agent for the shareholder-employee divided by the rate given by clause 3(4).

The amount of tax paid during the April/May AIM-instalment period for Oliver is $2,286.67 and for Emily is $1,386.67. The tax OAL pays as agent for Oliver and Emily will result in an increase to OAL’s accounting expenditure of $11,500 ($2,286.67 ÷ 0.198841 = $11,500) and $8,500 ($1,386.67 ÷ 0.163137 = $8,500).

Oliver’s personal residual income tax under the Income Tax Act 2007 is reduced by $2,286.67.

Emily’s personal residual income tax is reduced by $1,386.67.

The reductions in residual income tax arise under the agency arrangement between OAL, and Oliver and Emily, in accordance with paragraph (a) of the definition residual income tax in section YA 1 of the Income Tax Act 2007.

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 determination, 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:

    provision means an amount of accounting expenditure provided to meet expenditure not yet incurred.

  2. Any word used, but not defined, in this determination has the same meaning as in the Income Tax Act 2007 or the Tax Administration Act 1994 (as appropriate), unless the context otherwise requires.

  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