DET A5
Issued
10 Oct 2017

Tax adjustments for trading stock under AIM

Determination A5 covers tax adjustments for trading stock under the accounting income method - applies for the 2018-19 and later income years.

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 for trading stock to calculate year-to-date net positive accounting income and expenditure, after tax adjustments, for an AIM instalment period.

  3. This determination details a tax adjustment for trading stock as defined in section EB 2 of the Income Tax Act 2007. It applies for people who operate a periodic inventory system where the stock-take periods do not align with their AIM instalment periods.

  4. This determination does not apply to a person who has a perpetual inventory system that adjusts accounting income and expenditure for movements in trading stock at the end of their AIM instalment periods. A person who has a perpetual inventory system must value closing stock as determined by that system at the end of each AIM instalment period.

Application

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

Tax adjustments: periodic inventory systems

  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. If a person has a periodic inventory system and they do not complete a stock-take for the purposes of accounting for closing stock for an AIM instalment period in an income year (the current income year), the tax adjustment provided in subclause (3) must be made for the period.

  3. For the AIM instalment period, the person must make a tax adjustment to accounting income and expenditure on the basis that the closing value of their trading stock for the period equals the closing value of their trading stock for the income year before the current income year under section CH 1 of the Income Tax Act 2007. Opening value of the trading stock for the next AIM instalment period is equal to the closing value.

  4. If a person has a periodic inventory system and they complete a stocktake for the purposes of accounting for closing stock for an AIM instalment period (the current period), opening value of the trading stock for the next AIM instalment period is equal to the closing value for the current period.

Example 1:

Ava uses an AIM-capable accounting system to calculate her provisional tax liability.

The stock turnover in Ava’s business is low though the value of each item of stock is relatively high. She uses an inventory system that does not track each individual stock movement as they occur. In each AIM instalment period Ava completes a stocktake to determine the closing value of her stock on hand. Ava then manually records the value of her closing stock in her accounting software.

The AIM-capable accounting system that Ava uses will include the value of closing stock from the stocktakes Ava completes when calculating the cost of goods sold for each AIM instalment period.

Example 2:

Mason uses an AIM-capable accounting system to calculate his provisional tax liability.

For the 2018 income year Mason’s closing stock was $5,000 under section CH 1 of the Income Tax Act 2007.

He uses an inventory system that does not track each individual stock movement as they occur.

Due to the relatively low value of Mason’s closing stock during the 2019 income year he does not wish to complete a stocktake at the end of each AIM-instalment period.

In these circumstances under clause 3(2) of this determination a tax adjustment will be made to accounting income and expenditure to reflect a closing value of trading stock for the AIM-instalment period equal to $5,000. The opening value of Mason’s trading stock for the next AIM instalment period will be $5,000.

Example 3:

Keith uses a perpetual inventory system in his “Gadgets are us” store. This perpetual system interfaces with his AIM capable accounting software which uses those inventory records in calculating his income and expenditure for a period. Keith does not need to make any adjustment as his income and expenditure already includes a closing stock adjustment.

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:

    periodic inventory system, means a system which does not track each individual stock movement as they occur but relies on periodic stocktakes to determine the closing value of trading stock and calculate accounting income and expenditure in relation to it:

    trading stock has the same meaning as in section EB 2 of the Income Tax Act 2007.

  2. 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.

  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