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Overseas Held Bank Accounts

Globalisation has made it easier for people to invest money outside their tax residence jurisdiction. This has provided opportunities for offshore tax evasion.  New Zealand is one of many jurisdictions that has committed to a global initiative led by the Organisation for Economic Co-operation and Development (OECD) on the automatic exchange of financial account information using the CRS.  

 

This information is required by law to be collected by financial institutions around the world for reporting to tax authorities. Tax authorities will exchange this information to ensure everyone pays the right amount of tax. Tax pays for services we all need and to improve the communities we live in.

Just a reminder that IRD receives automatic exchange from offshore jurisdictions  of financial bank accounts held off shore. Inland Revenue commenced this automatic exchange September 2018 and continues to receive financial account information on New Zealand Tax residents and will will do so each year going forward. 

The CRS is a global framework for the collection, reporting, and exchange of financial account information about people and entities investing outside of their tax residence jurisdiction.

The CRS and a comprehensive commentary along with other information about AEOI are available on the OECD's automatic exchange portal. The CRS and the related commentary have been introduced into New Zealand law.

The CRS applies from 1 July 2017 to financial institutions, account holders and certain other people who control accounts.

What this means for account holders and certain controlling persons

If you hold an account with a financial institution (or if you hold an account for the benefit of another person) you may be asked to provide documentation and other information to assist that institution to carry out their due diligence and reporting obligations. This is required so that the financial institution can determine whether you are a foreign tax resident (or the person that you hold the account for is a foreign tax resident).

It is important that you provide accurate information when requested and update the information if there is any material change within a reasonable timeframe. This includes taking reasonable efforts to obtain and provide information about any persons that you hold an account for.

Penalties may apply if you provide false or misleading information, fail to provide this information, or fail to provide an update if there is any material change to the information you have provided. S

Tax reporting

 

You need to ensure that you keep us advised about your foreign bank accounts so that we can report any required tax requirements and income from these accounts.  

 

IRD Convictions 2007-2016

IRD Convictions
Number of people convicted 2007 to 2016

The information represents the number of people convicted under the Tax Administration Act 1994 in each calendar year. A person may have more than one prosecution in each year.

The information is supplied by the Ministry of Justice and may differ marginally from other analyses due to timing and differences in counting cases involving:

  • multiple defendants
  • multiple offences
  • alternative charges, and
  • representative charges.

However the numbers are broadly representative of Inland Revenue's conviction activity.
Graph of number of people convicted (excluding failure to furnish returns)

Large version of graph

+-Long description of graph

This graph has three lines plotting for the period 2007 to 2016, the number of people convicted for following types of offences:

  • evasion
  • employer-related, and
  • other.

Over the decade in question the number of people convicted for:

  • evasion offences has reduced significantly from 91 in 2007 to 55 in 2016
  • employer-related offences have tended to remain fairly stable, although between 2015 and 2016 that number tripled from 12 to 36
  • other offences decreased significantly between 2007 and 2016, falling from 43 to 3.

 

Graph of total number of people convicted (failure to furnish returns and total number of people convicted)


Large version of graph

+-Long description of graph

This graph has two lines plotting the total number of people convicted under the Tax Administration Act 1994 versus the number convicted solely for failing to furnish a return or provide information for the period 2007 to 2016.

From 2007 to 2016 the number of people convicted for failing to furnish returns or to provide the required information (down 96%) has fallen in line with the total (down 85%)

IRD- Tax Evasion Action Taken


Two Hamilton brothers have been sent to prison for significant tax and charities fraud.

In the Hamilton District Court this week, Judge Kevin Phillips sentenced 61-year-old truck driver Lindsay Scott to 3 years 6 months in prison. His older brother Roger, a 64-year-old lab technician, was sentenced to 2 years and 6 months imprisonment.

The two men were the remaining defendants in a major Inland Revenue prosecution against the Scott family group which also saw their sister Jillian, a former chartered accountant, sentenced to community detention and community work in April.

An associate, Martin Pim, was sentenced in April last year for operating a 'trust' and signing fraudulent donation receipts.

Inland Revenue spokesperson Richard Philp says over a 7-year period, the brothers and their sister, carried out a complex scheme to evade taxes and obtain fraudulent refunds from IR, primarily at the direction of Lindsay Scott.

"To make the scheme work, the Scotts incorporated 8 fraudulent companies and 10 supposedly charitable, non-profit entities. In fact, none of the entities undertook any charitable purpose," Richard Philp says.

"The family members registered companies for GST on the basis of property developments, claimed GST refunds on property purchases and fictitious expenses, which then provided a basis for claimed losses to be offset against their incomes.

"Some of the properties were never even purchased, and the 'property development' amounted to no more than wall papering, while they and family members lived in the properties.

"The family members also used the companies and charitable entities to circulate funds through a 'merry-go-round' of transactions to give the appearance of genuine charitable donations. They then falsely claimed charitable donation rebates providing each other with receipts and thank you letters

"The shell entities were, in fact, created with the sole intention of extracting fraudulent GST refunds and donation rebates."

Lindsay, Roger and Jillian Scott collectively claimed GST and Charitable refunds amounting to $594,821 through their group offending.

Lindsay Scott was sentenced for earning more than half a million dollars of undeclared income from which he evaded the assessment and payment of $103,785 of income tax over a ten-year period.

He also fraudulently claimed $4,652 of Working for Families tax credit while receiving a benefit.

"In sentencing on Tuesday, the judge recognised the aggravating factors in what the brothers did, in particular the abuse of the charities regime,' Richard Philp says.

"Both brothers were entirely unremorseful. They didn't accept blame for what they did or take responsibility for what they'd done.  They tried to paint themselves as victims because IRD had allowed them to make the claims. 

"People who rip-off the tax system are stealing from ordinary New Zealanders. Inland Revenue staff put a lot of time and effort into this successful prosecution because we believe it's important to protect the integrity of the tax system and to make sure there's a level playing field for all taxpayers."

 


 

PIR Rates

Using prescribed investor rates

Different prescribed investor rates (PIRs) apply to investors in multi-rate PIEs (MRPs). You need to use the PIR that applies to your situation to make sure you pay the correct amount of tax.

Once you have worked out your PIR you will need to give it to your PIE, along with your IRD number.

If we notice you are not using the correct PIR we will let you know. You will need to ask your PIE to change your PIR.

We might tell your PIE to change your rate if you have previously chosen a PIR to use. This does not remove your responsibility to let your PIE know your correct PIR.

Individual tax residents

New Zealand individuals have different PIRs depending on their worldwide income for the last two years.

The table below details requirements for each PIR. You need to work out your income for each of the last two years. You can then choose the lower PIR for the current year.

Taxable income was:

and taxable income including net PIE income

PIR

$14,000 or less

$48,000 or less

10.5%

$48,000 or less

$70,000 or less

17.5%

All other cases

 

28%

 

AIM- How Does it Work

AIM - an alternative provisional tax option for businesses

Designed for businesses that have turnover of less than $5 million a year, they can work out their provisional tax using the accounting income method (AIM).

What's on this page

·         How AIM works

·         Finding a provider of AIM-capable software

·         Your statement of activity

·         How AIM-capable software will work out your AIM payments

·         Making provisional payments using AIM

·         How AIM compares to other provisional tax methods

How AIM works

AIM uses functionality included in approved accounting software to work out payments. You can continue to use another provisional tax option if you think your business will not suit AIM. It will suit your business if:

·         your business is growing

·         you're new to business

·         you have irregular or seasonal income

·         it's hard to forecast your income accurately, or

·         you have accounting software or want to start using accounting software.

You can join AIM at any time during the y

ear from April 2019.

Once you've chosen AIM you'll only pay provisional tax when your business makes a profit. This helps you avoid cash flow problems.

As long as you make your payments in full and on time, there is no exposure to use-of-money interest. If your business makes a loss you can get your refund straightaway rather than waiting until the end of the year.

Start-up and ongoing costs to businesses

We worked to make sure AIM does not increase ongoing compliance costs and is simple for you to use during the year. AIM will help you spend more time on your business instead of worrying about tax bills.

What's new

·         you can join AIM at any time during the year from April 2019

·         two ways to treat profits paid to shareholder- employees when your business is using AIM

·         the ability to remove due date notifications for AIM shareholders

·         penalty and interest information is provided throughout the year, so no surprises, and

·         you can now use the GAP method for paying AIM provisional tax payments.

Two options for paying out the profits of an AIM company to its shareholding employees.

Option 1: No payments made to shareholder-employees throughout the year.

When an AIM company does not pay a regular salary to its shareholding employee during the year, this is likely to lead to the company overpaying provisional tax throughout the year.

These overpayments can be used to cover the income tax for the shareholding employee when their salary is paid at the end of the year.

Option 2: Regular salary payments are made throughout the year.

Each AIM payment would reflect the portion of shareholder salary that was paid during the period.

The company pays the tax on behalf of the shareholder using their marginal tax rate.

Any tax paid in the end of year wash up could be used to cover any remaining income tax liability the shareholding employee has as an agent of the AIM company.

If you're already using AIM, there's no need to opt in each year, continue to submit your statement of activity and pay when it's due.

You do not need to enrol or register to use AIM. On your first due date send us your statement of activity through your software and we'll know you've chosen to use AIM for the 2020 income year. You'll also need to send your payment if there is one to make.

Your statement of activity

On each AIM due date, your software will work out if you have a payment to make. It will collate the information to show us how it came to this amount - this is your statement of activity.

It is not an income tax return and is not processed as one. This means if you make a mistake you can simply fix it in the next statement.

What happens if a statement of activity is not filed

If a statement of activity is filed but payment is not made, penalties and interest will apply to the underpayment. These will continue to apply until you make payment.

You cannot miss filing more than two statements of activity. If you do, you will no longer be able to use AIM and we'll treat you as using the estimation option. The estimation option will apply as if you have been in it for the whole year. This will result in exposure to use-of-money interest. It will not be automatic - we'll talk with you first to make sure there has not been a misunderstanding or system error.

How AIM-capable software will work out your AIM payments

AIM-capable accounting software has the functionality to work out if it needs to include adjustments, for example:

·         Your depreciation register
Is it up to date and does it use our depreciation rates?

·         Private use expenditure
Has it been removed from accounting income?

·         Debtors and creditors
Optional, unless you include them for your GST calculation.

·         Trading stock
Included where you have a perpetual inventory system or:

·         it can be manually included, or

·         you can use last year's figure.

·         Prior year losses
If we've already assessed these, you can include them to reduce your payments.

·         Provisions
Shareholder salaries.

Find out more about these adjustments in the Tax Information Bulletin Volume 29, No 10

The profit remaining is used by your software to work out your provisional tax payment based on your:

·         company rate, or

·         individual rate.

If there's no profit you will not need to make a provisional tax payment.

 

Making provisional tax payments using AIM

Your AIM software will work out your provisional tax payments and let you know how much to pay. Your due dates for AIM are generally the same as your GST due dates:

·         monthly (if you're registered for monthly filing), or

·         two-monthly (if you're registered for two or six-monthly filing).

If you're not registered for GST, your dates would be the two-monthly GST due dates that align to your balance date. If you have a non-standard balance date, check with your software provider when you'll be able to start using AIM.

Provisional tax payment refunds

If you have a drop in profit that means you have overpaid you can get a refund through your statement of activity. You do not need to contact us or file any other documents. These refunds will help with cash flow if your profit drops due to seasonality impacts or an adverse event.

You can ask us in your statement of activity to:

·         release a partial or full refund

·         hold your refund, or

·         transfer to another tax type or customer.

How AIM compares to other provisional tax methods

Below are 3 different scenarios for businesses with less than $5 million turnover per year. In these scenarios we compare AIM to the standard, ratio and estimation methods for paying provisional tax. These scenarios look at types of businesses that could most benefit from AIM because they are:

·         new or growing

·         earning irregular or seasonal income, or

·         unable to accurately forecast their income.

standard versus aim when paying provisional tax banner

Scenario: Lydia is an avocado farmer and earns her profit between September and April.

How she pays provisional tax: Lydia uses the standard provisional tax method because her profits usually increase year to year. Based on last year's end-of-year tax assessment, she needs to pay $120,000 for her provisional tax this year. She makes a $40,000 payment in August, January and May. The August payment is difficult for Lydia because she makes most of her money between September and April.

How Lydia's year shapes up using standard method

How Lydia could benefit from AIM: Lydia would pay her provisional tax based on the money she made throughout the year. Lydia's software would calculate smaller, more frequent payments. These would align with her cash flow when she submits her monthly statement of activity. Since her income fluctuates, she could request a refund for overpaid tax in the current year instead of waiting until year end. AIM is the only provisional tax method that allows this.

How Lydia's year shapes up using AIM

Conclusion: Lydia finds it easier to manage her provisional tax payments using AIM and now has more time for maintaining her avocado farm during the busy season.

ratio versus AIM provisional tax banner

Scenario: John is a commercial fisher and owns his own boat. He can claim his boat as a depreciable asset, which will reduce his income tax.

How he pays provisional tax: He uses the ratio method to calculate provisional tax because his income fluctuates. His provisional tax lines up with his two-monthly GST returns. He pays 6 provisional tax payments during the year, based on his GST taxable supplies, totalling $59,800. He includes his depreciation expense in his end-of-year tax return which results in an assessment of $47,800. As it turns out, he gets a refund of $12,000 for overpaid tax.

timeline showing payments using ratio method

How John could benefit from AIM: Instead of waiting until year end, John would include his boat's depreciation expense when submitting his statement of activity every 2 months. He would end up paying less money when he made a profit and get money back on months he did not.

How John's year shapes up using AIM

Conclusion: John does not need to wait to receive his refund, making his cash flow easier to manage. When he files his end-of-year tax return there is no refund or further tax to pay because he already accounted for his income and expenses using AIM.

estimation versus AIM provisional tax methods banner

Scenario: Hemi and Aroha run a small film production company and their income changes a lot based on contracts they win for jobs.

How they pay provisional tax: Hemi and Aroha are unsure how much they'll make each year, so they use the estimation method. They estimate that they'll owe $30,000. They make their first $10,000 payment in August.

Over Christmas they win a new film contract. Hemi contacts IRD in January to increase their estimate to $60,000 based on the extra income. They make their next 2 payments of $25,000 in January and May based on the new estimation.

When they file their end-of-year tax return, they get a $57,000 tax assessment. Since they made their payments on time, they do not receive any penalties. But, interest is calculated on the difference between $19,000 (one third of the assessment) and the tax paid on each date.

How hemi and aroha's year shapes up using estimation method

How they could benefit from AIM: Hemi and Aroha would send us a statement of activity every month when they file their GST. They would only need to make provisional tax payments in June, December and January, when they made their profit. Their software would work out that nothing was due to be paid on the months that they did not earn an income.

How hemi and aroha's year shapes up using AIM

Conclusion: Hemi and Aroha will not need to re-estimate their provisional tax if they earn more income. Also, they will not be charged interest due to underestimations if they pay what their software tells them to, in full and on time. They're less stressed and have more time to focus on growing their business.

Workplace events are a great way to build team spirit and round off a busy year. If you're treating your staff this festive season - especially if you're serving alcohol - here are some tips to help you be a responsible host while ensuring everyone has a great time.

Be a great host

Putting on a holiday celebration for your employees is a way to say thank you for a busy year.

You may choose to offer alcohol at your event, or allow people to bring their own. If you do choose to include alcohol at your workplace function, make sure it's supplied in a way that fits with your workplace alcohol policy.

If you don't have a workplace alcohol policy, you can create one using the Health and Wellbeing template on Workplace Policy Builder.

You can create other policies too, including flexible work, leave and holidays, IT and social media, and family violence.

Workplace Policy Builder (external link)

You don't have to serve alcohol at work events for everyone to have a good time and feel appreciated for their hard work.

Ways to build connection and celebrate a busy year without alcohol might include:

  • timing events for when alcohol wouldn't be expected – maybe at breakfast or morning tea
  • focusing on an activity, learning something new or visiting somewhere, rather than eating and drinking
  • volunteering – many businesses sponsor their teams to take a day off to help the community.

Serving alcohol at work events

If you do serve alcohol at your work event you must be a responsible host. It's about helping people enjoy themselves and staying safe while drinking alcohol.

That means providing plenty of food, water and low or non-alcoholic options, ensuring no one drinks alcohol who shouldn't (eg, anyone under 18 or people driving), and helping people get home safely.

Age and the law (external link) - Alcohol.org.nz

Check if you need an alcohol licence. It will depend on the size of your function, whether it's open to the public, and whether alcohol is sold or supplied. The alcohol licensing team at your local council should be able to help.

Council maps and websites (external link) - Local Government New Zealand

What you can do

These tips work well for any event or party, not just work functions. You may want to share them with your staff or anyone else helping you host.

  • Limit the supply of alcohol: Provide only a certain number of drinks per person. Ideally, have someone serve alcohol rather than allow self-service.
  • Provide alternatives to alcohol: Have plenty of low and non-alcoholic options and drinking water.
  • Say "Yeah, Nah": It's totally OK to say "Nah" to another beer, and "Yeah" to a glass of water instead.
  • Eat up: Encourage people to eat and make sure it's easy for them to access food.
  • Mingle, talk, play, dance: Put on some games and activities, play music for people to dance to, so they have more to do than just drink.
  • Model behaviour: Make sure everyone knows a certain standard of behaviour is expected. Make sure you, as the host, lead by example.
  • Be SunSmart: If your function is outside, encourage people to bring a hat and glasses. Make sure you provide sunscreen that is water-resistant, broad spectrum, at least 30SPF. Have spare hats for those who forget their own.
  • Look after young people: Remind everyone to keep an eye out for each other, both to discourage too much drinking and to help young people, or anyone, who may have had too much alcohol.
  • Get home safe: If you're offering alcohol, it's your responsibility to make sure everyone can get home safely. Have a transport plan and even provide some taxis.

The Health Promotion Agency has a helpful guide to learn more about keeping employees safe when drinking alcohol at work.

Serving alcohol safely at work events [PDF, 137KB] (external link) - Alcohol.org.nz

If you work in a safety-sensitive industry, discourage your people from coming to work hungover. Alcohol impairment can last into the next day, creating safety risks for the employee and those working with them. That's another good reason to limit alcohol, or hold your work do before a non-work day.

Alcohol facts and information for employers (external link) - Wellplace

 

Paid parental Leave

Paid parental leave payments

We'll make paid parental leave payments to your bank account each fortnight. We'll treat these payments like any other income and deduct tax and any other payments, for example student loan, child support or KiwiSaver.

How much your paid parental leave payments will be?

If you work for someone else, your payments will match your ordinary pay up to a maximum of $585.80 a week before tax.

If you're self-employed your payments will be either a:

  • maximum payment to match your average earnings up to $585.80 a week before tax, or
  • minimum payment of $177 a week before tax.

You will receive at least the equivalent of 10 hours per week at the minimum wage.

From the 2019-20 income year new ring-fencing rules apply to residential property deductions. Ring-fencing means residential property deductions can only be used to offset income from residential property. You cannot use rental losses to offset other income like salary and wages.

Under the rules, you can only claim deductions up to the amount of income you earn from the property for the year.

You must carry forward deductions over that amount. You can use these deductions to offset your rental income in future income years.

Types of property subject to the new rules

The new ring-fencing rules apply to residential land - mainly residential rental properties. This includes overseas property held by a New Zealand tax resident.

The rules generally apply no matter how the property is held. The rules apply to property owned by you or:

  • a partnership
  • a look-through company
  • a trust, or
  • a close company.

If you have a tailored tax code and rental income, the new ring-fencing rules may affect you. 

The rules do not apply to:

·                  your main home. If you have more than one house, the main home is the one you have the greatest connection with

·                  property that comes under the mixed-use asset rules. For example, a family bach you sometimes rent out, sometimes use yourself, and is vacant for 62 days or more a year.

·                  farmland

·                  property used mainly as business premises

·                  property that will be taxed when it's sold, regardless of when you sell it. This includes property held in land related business and property bought to sell.

·                  property owned by companies (other than close companies)

·                  employee accommodation (in most cases)

·                  property owned by Government enterprises.

Options for owners of more than 1 rental property

If you own more than 1 residential rental property, you can choose whether to apply the rules across your portfolio of properties, or to apply them on a property-by-property basis - keeping separate accounts for each property.

The portfolio basis (the default)

If you apply the rules across your portfolio of properties, the deductions for all the properties offset the income from all the properties.

If the rental portfolio is loss-making overall, you must carry forward the excess deductions.

Property-by-property basis

Here, you look at each separate property. You can only use the deductions for a particular property to offset the income from that property.

Talk to us about which approach is best for you.

 

Rental Losses- Ring fenced

RESIDENTIAL RING FENCING OF LOSSES

 

You may have heard about the residential ring fencing of losses that were recently passed into law;

 Under the provisions, speculators and investors are no longer able to offset tax losses from their residential properties worldwide against their other income (e.g. salary or wages, or business income) to reduce their income tax liability.

 What can losses be utilised for?

Ø  Future residential income and;

 Ø  Any income on the sale of residential land e.g. any capital gain caught under the Bright-line test rules.

 Losses can't be used to offset income from other investments.

 The new rules apply from 1st April 2019 for the 2019/20 and later income years.

 Exclusions from the operation of the rules:

Note that the following types of property are also excluded from the operation of the rules under specific provisions:

 ? a person's main home (s EL 9)

? property held on revenue account (s EL 10)

? property held by certain persons and entities (s EL 11)

? property to which the mixed-use asset rules apply (s EL 12), and

? property provided as employee accommodation.

 To see if you would qualify under an exemption, please contact us!

 So, what does this mean for you?

 There are two ways residential losses can be treated;

 1.       Property by property

2.       Portfolio basis

 Property by property allows for the losses on one particular property to be used on that property alone.

 Portfolio basis allows for the losses of all residential properties to be used against any and all residential properties in the portfolio, even if one of the properties in the portfolio is sold, its losses can still be continued forward.

 There is no generic advantage in selecting a property by property basis, however, talk to us as it may be right for your specific circumstances.

Unless the sale of your residential investment is taxable and/or the property is not expected to make a profit, the losses from a residential property are, essentially no longer of any use.  Due to this, you may find that your tax bills next year may be higher than before.

If you would like help in structuring and preparing for the change, please contact us.

 "For more information on the tax rule change and other important changes for landlords click on the links below"

 1.       Rental properties: New laws now in effect.

https://www.business.govt.nz/news/healthy-homes-july-2019/?utm_source=utm_Newsletter&utm_medium=utm_email&utm_campaign=utm_July2019&utm_content=https%3A%2F%2Fwww.business.govt.nz%2Fnews%2Frental-properties-new-laws-now-in-effect%2F

 2.       Law changes: Natural disaster cover for landlords and tenants.

https://www.business.govt.nz/news/eqc-law-changes-2019/?utm_source=utm_Newsletter&utm_medium=utm_email&utm_campaign=utm_July2019&utm_content=https%3A%2F%2Fwww.business.govt.nz%2Fnews%2Feqc-law-changes-2019%2F

 

Explaining Shareholder Current Account

1 What is a shareholder current account?

The shareholder current account is essentially a loan either to or from the company to a shareholder.

Often when companies are registered the shareholder pays a share capital, this amount varies for each company. You would see this recorded under Retained Earnings on the company's Balance Sheet

Any amount put in by the shareholder in excess of the share capital is called funds introduced and is recorded in the shareholder current account.

During the life of the company, funds taken out or put into the company by the shareholders is recorded to the shareholder current account. Funds put in by the shareholder increases the current account. Funds taken out by the shareholder reduces the current account.

What is Shareholder Current Account?

2. What are drawings?

As a shareholder, if you are not paying PAYE on any money that you are taking out of the company, then you are essentially taking drawings out of the company. A company is a legal entity so any funds that it generates is not your money, even if you are the only shareholder in it.

Likewise if you are putting money from your personal bank into the company then it is your funds introduced into the company.

 3. Are drawings a tax-deductible expense for the business?

Simple answer is No, drawings are not a tax-deductible expense of the business. You will never see drawings in the Statement of Financial Performance/ Profit & Loss Account of the business.

Drawings are posted in the Shareholder Current Account.

4. Can a shareholder take drawings from a business?

Yes, however you cannot take out funds that is in excess of what you had actually put into the business.

This will create a situation called shareholder current account overdraft. This means that the company must either pay FBT to the IRD or charge the overdrawn shareholder, interest at the IRD prescribed interest rate. The prescribed interest rate is set by the IRD on a quarterly basis and currently sits at around 6%.

The interest becomes taxable revenue of the company and it further exacerbates the shareholder current account balance.

5. How to fix an overdrawn shareholder current account?

There are a few ways to fix an overdrawn current account but we will focus on three common ways.

1.      Repay the loan from the company.

2.      Declare a shareholder salary, the company needs to earn a profit to allow a shareholder salary to be paid. The shareholder salary will be taxed in the hands of the shareholder.

3.      Declare a dividend.

Any one of the above or a combination of them can be used to clear the overdrawn shareholder current account.

Points 2 and 3 above will be limited to any retained earnings or past capital gains and the company must be solvent both before and after a dividend or shareholder salary is declared. A company that has made profits and has paid tax will generally have retained earnings.

Generally the dividend is paid in proportion to the number of shares held.

If a dividend is paid the company is required to attach tax credits to it. These are called imputation credits and are simply the tax the company has already paid on its profits (currently 28%) and are recorded as part of the dividend so that the shareholder does not end up paying tax on income that has already been taxed at the company level.

Say if a company has an overdrawn current account of $1,000. The total gross dividend that will need to be declared to clear this will have to be $1,492.53.

In order for a company to declare dividends, it requires 33% in available tax credits to be attached.

These tax credits would be from imputation credits at 28% (the tax that the company has already paid on its profits) and a top up of 5% called the dividend resident withholding tax (DRWT)

 6. What is Dividend RWT?

As the company tax rate is 28%, and the top personal and trust rate is 33%, when a dividend is paid the company must pay 5% dividend resident withholding tax (DRWT) to Inland Revenue on the 20th of the month following payment of the dividend.

 7. How is the dividend treated by the shareholder?

The shareholder will have to declare the gross dividend and the attached imputation credits and DRWT in their personal tax returns. Depending on their personal tax rate the individual shareholder may be eligible for a refund from the IRD of the DRWT whilst any excess imputation credits will be converted to losses and will be available to be carried forward and offset against their future personal income.

If the dividend is declared to a Trust shareholder than the trust has a choice of retaining this or passing it onto its beneficiaries.

The advice in this article is general in nature. Your specific circumstance may vary therefore you should seek advice on your situation, call the writer for a discussion.


 

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Phone: (+64) 09 575 9873
Fax: (+64) 09 575 9863

Email: mgr@kinghans.co.nz

Northland Office

2 Broadview Road
Off SH11
Opua

Phone: (+64) 09 402 5133
Fax: (+64) 09 575 9863
Email: mgr@kinghans.co.nz