Latest News [index] Guidance on setting below market salaries
The use of companies, trusts and other business structures do not of themselves give rise to tax avoidance, even where tax savings result. However, as the use of such structures can provide the true controllers of businesses to divert income to taxpayers with lower marginal rates it is important to establish when these arrangements are permissible for tax purposes.
Although there is no single determinative feature the IRD has released a revenue alert providing guidance on this subject. In that alert the Inland Revenue notes that there may be non-tax reasons why a business may pay an employee less than market rates. Acceptable situations include where:
· adverse business conditions mean that the business' profits are down but most of those profits are still paid out to the employee who derives the income
· it is financially prudent to retain some profits in the business because it is anticipated that the business may experience financial difficulties in the near future
· the profits are set aside to acquire business assets in the next financial year, or
· the business relates to a charity and the individual receives less to ensure the charity's return is maximised.
See further at http://www.ird.govt.nz/technical-tax/revenue-alerts/revenue-alert-ra1102.html