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LTCs, wages and cars 13 Feb 2012
PROFITS in a Look-Through Company (LTC) are automatically shared by the shareholders in proportion to their ownership.
 
Unfortunately, this does not mean a couple with one working partner can simply share the company income equally. If they were to do this, and there was a tax saving it likely to be tax avoidance. The sole working owner should generally be paid a market salary.
 
Working shareholders must also enter into an employment contract with the company (see Time to get financial records in order, page 1) If you fail to have a signed employment contract which complies with the LTC law, you are not an employee for tax purposes and the wages paid become non deductible for tax purposes.
 
Further, as you are not an employee, fringe benefit tax does not apply. Therefore if you use a business vehicle partly for private purposes, you would have to keep a log book. Costs would need to be apportioned between business and private.
 
Make sure you have employment contracts if your company is going to pay wages to its working owners. Last September the IRD proposed to do away with FBT on cars used for private running by owners. They would have to keep a log book and apportion running costs, regardless of whether they were on PAYE. This change has not yet become law.
 
It was incorporated in the last tax Bill and may yet get dumped, hopefully.
 
What if your LTC is an investment company?
 
You are not permitted to pay one of the owners a salary even if this could be justified. Assuming your investment is a rental property, if you need to use a car, you could only claim a share of the costs, based on mileage disclosed by a log book, or you could claim kilometres run at rates permitted by the IRD.

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