Tax Bites #17

About the Author:

MURRAY McCLENNAN

Director at Tax Central
A chartered accountant and a member of the International Fiscal Association and the Society of Trust and Estate Practitioners, Murray has over 30 years experience in tax.

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This issue focuses on common issues for family-owned businesses.

SALARY PAID TO SPOUSE/LIFE PARTNER

To be deductible, a payment to a spouse, civil union partner, or de facto partner must be approved by Inland Revenue.  Such approval will only be granted if:

1.  the payment is for actual services rendered;

2.  the services are not domestic services or other services connected with the home; and

3.  the payment is incurred by the payer exclusively in deriving the payer’s assessable income.

The approval must be granted before the deduction is claimed.

Although it is not generally necessary to seek Inland Revenue’s approval each year to ensure a deduction, a new application for approval must be made if the amount paid increases, other than by way of a general wage or industry increase.

 EXCESSIVE REMUNERATION PAID FROM A CLOSE COMPANY

There is an anti-avoidance provision in the income tax legislation that denies a deduction for excessive remuneration paid by a closely held company to a shareholder, directors or relatives.

If the remuneration paid is excessive, the excess remuneration is treated as a dividend, unless:

•  The recipient is an adult employed substantially full time in the business of the company;

•  The recipient participates in the management or administration of the company;

•  The amount paid is not influenced by the recipient’s relationship with a shareholder and director of the company, and

•  The recipient is a New Zealand tax resident.

The non-deductible amount is dividend income to the recipient, it is not a dividend for resident withholding tax and imputation credit purposes.

OVERDRAWN SHAREHOLDER CURRENT ACCOUNT 

A common issue is that of overdrawn shareholder current accounts.  If a shareholder current account is overdrawn during the tax year, FBT is payable unless:

1.  Interest is paid by the shareholder at least at the prescribed interest rate for FBT; or

2.  A shareholder salary is paid and applied to the overdrawn current account. There is specific legislation that allows the salary to be credited to an overdrawn shareholder current account, or a loan to a shareholder, on the later of the first day of the income year or the date that the current account first became overdrawn during the year.

Note:

1.  The crediting of shareholder salary in this way is conditional on the salary being paid without the deduction of no PAYE; and

2.  The cash portion of dividends credited will also assist, but the crediting is not back dated.

FBT — MOTOR VEHICLE TAKEN HOME FOR SECURITY PURPOSES

There is a common misconception that an employee taking a vehicle home for security purposes is not “private use” because the vehicle is taken home for the benefit of the employer.

In fact, “private use” of a motor vehicle includes the employee’s use of the vehicle for travel between home and work even though:

1.  The employee receives minimal benefit from the use of the vehicle;

2.  The employee has another car which he or she uses for his private travel in evenings and weekends; and

3.  The employer has written a letter to the employee prohibiting use of the employer’s vehicle other than for business use and for travel to and from work.

Note, the employer could apportion its vehicle expenditure between business and private use instead of paying FBT.

If the employee’s home is also a place of work, travel between work (such as another office or a client) and home may be treated as non-private travel.

Murray McClennan

Director

Tax Central Ltd

027        244-5365

www.taxcentral.co.nz

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