Tax adjustments for private expenditure under AIM
Determination A4 (10 Oct 2017) relates to tax adjustments for private expenditure under the Accounting Income Method for calculating provisional tax.
- 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.
- 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 for private expenditure to calculate year-to-date net positive accounting income and expenditure, after tax adjustments, for an AIM instalment period.
- The private limitation is set out in section DA 2(2) of the Income Tax Act 2007 and provides that a person is denied a deduction for an amount of expenditure or loss to the extent to which it is of a private or domestic nature.
- If accounting expenditure includes an amount of private expenditure, a tax adjustment is necessary to exclude that expenditure.
- This determination applies for the 2018-19 and later income years.
- This determination does not make tax adjustments relating to entertainment expenditure to which section DD 1(1) of the Income Tax Act 2007 applies.
Tax adjustments: private expenditure not included
- 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.
- For a person, for an instalment period, accounting expenditure must not include an amount of private expenditure.
Kelvin uses an AIM-capable accounting system to calculate his provisional tax liability.
From his logbook, Kelvin knows that 17% of his travel in his motor vehicle is private travel. Kelvin applies this percentage to the cost code for motor vehicle expenses in his accounting software.
An AIM-capable accounting system will exclude 17% of Kelvin’s motor vehicle expenses because 17% of this expenditure is private in nature.
Jennifer uses an AIM-capable accounting system to calculate her provisional tax liability.
During the instalment period April/May, Jennifer paid for her children’s school trip from her business’s bank account. Jennifer has excluded the costs of the school trip from accounting expenditure by recording these costs against her shareholder current account.
For the April/May instalment period, a tax adjustment is not required to accounting expenditure to exclude the cost of the school trip.
Tax adjustments: manual and automatic
A tax adjustment under this determination must be made by—
- the user of the accounting software, manually:
- the accounting software, automatically:
- 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.
- 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:
private expenditure, for a person, is the expenditure for which the person is denied a deduction under section DA 2(2) of the Income Tax Act 2007.
- Any word or term that is defined in a Revenue Act and used, but not defined, in this determination has the same meaning as in that Act.
- 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.