Provisional Tax - A Better Way

8th of August 2022 marks the 1st 2023 provisional tax for March balance date businesses.

Many are still using the ‘standard uplift method’. A crude way of calculating provisional tax based on a 5% increase of the prior year, or 10% of 2 years prior, if the last years tax return has not been filed yet.

With the fast pace changing business environment, more often than not, what happened 2 years ago has little or no relevance to current trading.

This method was in existence well before I started as an accountant. A time before computers, when paper ledgers were kept and the time and cost involved in management reports meant many small business just did not have the capacity to easily prepare interim Profit and Loss reports.

Technology had changed all that, the time and cost involved in preparing ‘pretty good’ Profit and Loss Statements has become a lot easier due to applications such as Xero.

AIM Provisional Tax Method

This new method has been around for a couple of years now.

Using AIM means we prepare a 2 monthly Profit and Loss at the same time as preparing our clients GST return. This takes a little extra time but once we get systems in place we can often get a ‘Pretty Good’ idea of the previous 2 months profitability.

Based on updated ‘year to date’ profit we then prepare a provisional tax calculation. This calculation also takes into account allocation of profits to shareholders, other income and other wages of shareholders in calculating the tax.

Simplicity – tax follows profitability

The logic is that by calculating tax based on current trading your tax bill more closely matches a portion of the business profitability.

Have a great couple of months and you will pay more tax, that’s often easier to do when trading is good. Have a poor could of months and the tax bill drops, or you might get some of the tax paid earlier back.

We recommend AIM where appropriate to most of our clients and find it works well. While you are paying tax earlier it provides piece of mind of being on top of your taxes.

An added bonus is having a better idea how you business is tracking every couple of months.

Best of all it helps remove that end of year tax SURPRISE, no one appreciates those.