Accounting for small-to-medium businesses (SMBs) might be about to change as the IRD considers revamping the way businesses with a gross income of less than $5million pay their taxes.
The Accounting Income Method (AIM) reporting is the suggested alternative to the current provisional tax reporting system, with proposed amendments coming into effect in the 2018-2019 tax year.
The IRD says AIM is a significant step forward in making tax part of running a business, rather than a separate process.
Techday spoke to Mike Atkinson, director of accounting firm Bellingham Wallace, about the implications AIM reporting would have on business owners in New Zealand.
Provisional tax reporting vs AIM reporting
“In layman’s terms, traditional reporting is based on an external accountant, typically providing some tax adjustments for a business, and then that tax being lodged with the IRD within a period of time and typically sitting on a tax accountant's agency,” Atkinson says.
“AIM will be a pay-as-you-go tax for businesses based on a generalised gains system. Businesses talk directly to the IRD, and they submit figures and pay tax based on those figures.
“If there’s overpayment or underpayment, it adjusts throughout the year, and it adjusts for seasonality.
Provisional tax is paid three times a year, whereas AIM reporting would require tax to be paid every two months.
Implications for small-to-medium business owners
In order for businesses to take advantage of AIM reporting, businesses would need to be using a computerised accounting software system.
The advantages of AIM reporting that the IRD has pitched to business owners is that they won’t have to pay use of money interest on tax as they go and that if they pay their taxes through the year, they won’t get penalised if they make more profit than forecasted.
“Another advantage the IRD suggests is that having a computerised accounting system means businesses will be better prepared to pay their tax from a cash flow point of view and have better information to make more accurate decisions moving forward,” Atkinson says.
Software compatibility for AIM reporting
Atkinson says that it's highly likely the IRD will prescribe a number of accounting systems accessible to SMBs that are compliant to AIM reporting when it’s implemented.
Grant Linton, Reckon Accountant Group general manager, says accounting software will need to be certified by IRD as AIM compliant.
“The software will need the ability to produce a Provisional IR10 - essentially this is summarised trial balance which reports the financial position of a business.”
Atkinson says that for business owners, the main criteria for their chosen accounting software is that they need to be easy to use and cloud-based so that they can easily share reports with their internal staff or external advisors.
The evolution of the accounting role
The accounting profession has changed a lot in the last 20 years.
“With the evolution of Xero and other accounting software, business owners are essentially doing accounting themselves, and accountants have to change the way they interact with business owners,” says Atkinson.
But even with a computerised system, they still need to classify transactions correctly and for a number of business owners, they’re still going to need the help of an accountant with that.
“The opportunity for business owners moving forward – instead of getting a once-a-year snapshot from a tax advisor – is actually an ongoing discussion around what trends are being seen in the business, where are the risks, and where’s the opportunity for growth.”
Atkinson says that accountants will have to find different ways to engage with their clients.
“While AIM is simplifying income tax, it’s not going to solve all tax issues for a business.
There’s still a lot of opportunities where accountants can add value, Atkinson says, but the reality is that accountants probably aren’t used to either communicating the value they can add, knowing how to add that value.
“So that’s a bit of a retrain for accountants.”
He adds that even though AIM could be taking away some of the bread and butter for accountants, it also opens up conversations with clients and typically, those are conversations business owners actually want to have – how they can do better as a business, how they can grow, and how they can aim for success.
“The conversation needs to shift to what could happen moving forward and talking a bit more about strategy and setting goals and targets.”