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Take care when setting remuneration 31 Oct 2014

Rules exist to stop people paying too much salary or profit share to a family member, as a way of paying less tax.

Make sure any income you want to allocate to a relative, working in your business, can be justified.

If you get caught paying amounts you can't justify, IRD can reallocate the income. In most cases the consequence will probably be a Use of Money Interest charge going back three or four years and potentially penalties. For small companies, the company income is increased by the amount deemed excessive and the shareholder is deemed to have received a dividend, with no Imputation credits attached.

A defence against excess remuneration in a partnership or Look Through Company is to have an agreement, which must comply with these rules:

  • Be in writing and signed by all partners.
  • Binding for at least three years.
  • All partners or owners must be over the age of 20 when the contract was signed.

For partnerships, each partner must have control over their share of profits and be liable for their share of losses.

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