Beware of paying excessive salaries

by Shawn O’Grady
3 Minute(s) to read

Beware of paying excessive salaries

It is very common for family owned companies to employ members of the family in the business on a permanent or casual basis. There is no problem with this per se, however income tax rules seek to prevent ‘excessive salaries’ being paid to family members. 

Inland Revenue has recently been focusing on this issue and has been scrutinising the type of work completed, the amount paid, the way in which it was calculated, and what a third party might be paid for the same work. 

There is no precise measurement as to what constitutes ‘excessive’, as each case is different. What is most important is that business owners determine the value of a relatives remuneration based on the service provided to the business. The relative should be paid the same amount as an unrelated employee performing similar duties. 

IR has the ability to intervene and reallocate remuneration, income or losses if it considers the amount is not reflective of the value contributed. If an amount is deemed to be excessive, the excess may be recharacterised as a dividend and therefore non-deductible to the payer. Where salaries to family members are paid it is important to ensure the employment and the amount paid is calculated and documented on an arms-length basis.

 

Coffee?

New Zealand may be perceived as clean and green by the rest of the world, but we have a significant and growing problem. As a country we guzzle our way through approximately 295 million cups of takeaway coffee a year. 

But coffee cups are recyclable, I hear you say. Unfortunately not; they’re treated with something called polyacetylene (PE), which makes them coffee-proof, but extremely difficult to recycle. To be recycled the PE lining needs to be separated from the cardboard, which is extremely complex, and not many recycling plants have this capability meaning most cups go to landfill. This is an issue that is set to continue unless we change our habits. How can we fix it? By changing to a cup that is properly recyclable, or by investing in new specialized facilities. 

Alternatively you could buy your own reusable cup, however, the energy and resources to manufacture these may outweigh the benefits. It has been said that in order to gain an environmental benefit over a takeaway cup you must reuse your cup until it reaches the end of its life, which could be between 1000-3000 washes. Are you ready to commit to using a single reusable cup for the next 8 years?

Something to be discussed at the water cooler…what type of cups does that have?

 

HAVE WE GOT YOU THINKING?

Give us a call on (04) 563 6965 or email: dennis@taxman.co.nz or shawn@taxman.co.nz

Keep an eye out for November’s article!



TAX DATES TO REMEMBER

  •  20th October. 2018 - monthly employers PAYE payment…

  • 28th October. 2018 - Bi monthly GST Return for Aug/Sep 2017…

  • 28th October. 2018 - Six monthly GST Return for Mar/Sep 2017…

  • 28th October. 2018 - First instalment of 2018 Provisional Tax for six monthly GST filers…