A Week in Review
Shareholder Salary Adjustments…
IR has released a Standard Practice Statement (“SPS”) with respect to the making of retrospective adjustments to salaries paid to shareholder employees.
SPS 18/01 describes the various scenario’s under which IR may consider and agree to a section 113 request from a taxpayer, who is looking to amend (either up or down) a previous filing position for the company (and the affected shareholders), which reflected a certain level of shareholder salaries paid.
With any such request by the taxpayer usually required to be made in accordance with section 113 of the Tax Administration Act 1994 (“TAA”), as often the four month NOPA window would have already passed, SPS 18/01 is closely aligned with both SPS 16/01 – Requests to Amend Assessments, and SPS 09/02 – Voluntary Disclosures, although most of the commentary in SPS 18/01 is with respect to the processes set out in SPS 16/01.
SPS 18/01 applies from 1st April 2018, and it replaces SPS 05/05, although the earlier version only considered retrospective reductions in salary amounts, not increases.
For those of you who have read SPS 16/01, you will appreciate that IR essentially has a four phase process which is applied to any section 113 request received. Phases 2 and 3 will be overlooked however, where upon the initial phase 1 examination, it is clear and obvious that an error has occurred and can be easily corrected. SPS 18/01 concludes that changes in a shareholder salary are an example where a section 113 request can proceed straight to phase 4.
Phase 4 simply asks the question, of whether there is any reason IR should not make the amended assessment, and most of the narrative of SPS 18/01 discusses this question, providing examples of both yes and no answers.
In cases where:
- there is a tax avoidance arrangement (fairly obvious I would have thought);
- no evidence is able to be provided that the original salary declared was declared in error; or,
- the shareholders/company are not in agreement that an error has occurred,then IR is unlikely to approve the section 113 amendment request.
However, where there is evidence of an error having occurred, with the amount of company profit shown to now be incorrect because there has been a subsequent amendment to the profit, IR is likely to approve the request. In this respect, SPS 18/01 provides examples of the taxpayer being able to show:
- historical evidence that all company profit declared as salary; or,
- historical evidence that a fixed percentage of company profit will be declared as salary; or
- historical evidence that salary will only be declared out of company profits and not losses; etc.
There may also be instances where the company profit itself is not in error, however evidence can be provided to show that the amount of shareholder salary reflected was not as originally agreed between the company and its shareholders, perhaps due to an arithmetic, transposition or keying error.
Without question, documentary evidence will be key, and I would suggest, that even if it’s usually just a matter of course to clear out a client’s annual profit to salaries, it would be prudent to document the decision rationale just once, with the words “until varied in writing”, or something similar, and then simply store it away, to be close at hand, should the need ever arise to produce it.
Have your say on the Trust’s Bill…
Not tax related directly, but its importance makes it worthy of a mention nonetheless, either because you are keen to have you say or you are just interested to know where things are presently at, the 5th March closing date for public submissions on the Bill is fast approaching.
- Introduced to replace both the Trustee Act 1956 and the Perpetuities Act 1964, changes from the old legislation implemented by the Trust Bill, will include:
- describing key features of a trust to help people understand their rights and obligations;
- mandatory and default trustee duties to provide clarity to those in the position to help understand their obligations;
- beneficiary disclosure requirements (where appropriate);
- more flexible trustee powers;
- cost-effective establishment and administration support provisions; and,
- options for removing and appointing trustees without having to go to court to do so.
The Justice Committee who are presently reviewing the Trust Bill post its first reading before Parliament in December 2017, have a report back date set for June 2018.
Richard Ashby BBus, CA, CPA PARTNER
Ph: +64 9 365 5532
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