A Week in Review

Paying those close to home

It is a fairly common occurrence that a client will ask about making payments out of their business to family members, in particular spouses and partners, that can be considered tax deductible for the client, thereby potentially providing a tax advantage, where that spouse or partner is on a lower marginal tax rate than the taxpaying business – whether that be in respect of the client trading in their own name, or via some interposed structure, such as a company.

The prime concern on such occasions, is naturally how Inland Revenue will view the payments, and what records the client should maintain in order to support the level of payments made. Some assistance in this regard, may now be provided by IR’s latest draft Questions We’ve Been Asked (“QWBA”), PUB00311.

The QWBA is entitled “What are the requirements for claiming tax deductions for payments to family members for services?” The answer, and fairly obvious to a large extent one would suggest, is that firstly the person actually has to provide some sort of services to your client’s business, and secondly, any amount paid must not be considered excessive. There is also the third qualification for non-company scenarios, where the payer must have obtained the Commissioner’s approval in advance of the deductions being claimed in respect of spouse or partner payments.

Unfortunately, while I suggested above that some assistance to your client’s query may be provided by the QWBA, a word of warning however that it is very light on content. The commentary on how you prove the family member has actually provided services to your clients business, is of limited help and relatively fluffy in my view, while the issue of excessive payments is essentially covered off by referring you to the earlier QB 14/09: Income tax – meaning of ‘excessive remuneration’, for guidance.

PUB00311 does however provide some useful content around the issue of seeking prior approval for payments to spouses and partners, and I would suggest in this regard, that you heed the warning that IR cannot backdate approval once the tax return in which the payments made are being claimed has been filed (although its suggestive therefore that you can still obtain retrospective approval where the relevant income year in which the payments were made has ended, but you just haven’t filed the tax return yet).

Finally, do not overlook the potential GST consequences related to the payments, particularly if the annual amount to be paid is likely to exceed $60,000 (or the family member has other non-PAYE personal services income sources, which when combined with your client’s payments will be in excess of $60,000), and your client is looking to treat the family member as an independent contractor to their business, as opposed to an employee.

The deadline for comment on PUB00311 is 21^st December 2018.

Do you need assistance with anything tax?

Just a reminder of the taxation services we provide, should you ever have a need:

• Q & A – email or call with those day to day questions that often arise, where the issue is simply outside of your area of expertise, or you think you know the answer, but would simply like a sounding board to bounce your thoughts off. No minimum charge or subscription.
   
• Detailed Opinions – for those more complex issues, where your client would like a detailed written opinion for their files. The engagement is scoped upfront, with a cost estimate provided, so you can obtain approval from your client before the work commences.
   
• IRD Assistance – either with risk reviews/audits or management of tax debt. Scope of service can range from simply strategy advice through to full management of the review/audit process, or negotiating suitable debt repayment arrangements or tax relief requests. Usually scoped on a staged basis, as when dealing with Inland Revenue, how long is the piece of string when attempting to determine how long the issue may take to resolve.

Want to learn more? Please do not hesitate to give me a call.

Richard Ashby BBus, CA, CPA
PARTNER

Em: [email protected]
Ph: +64 9 365 5532
Mb: +64 21 823 464