Taxing times for resort businesses

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Queenstown businesses – big or small – could be affected by a ground-breaking legal decision over tax avoidance, a local tax specialist says. 

WHK’s local senior tax manager Wendy Duncan says the Supreme Court’s ruling in favour of Inland Revenue last week will have a far-reaching impact on local company owners. 

The ruling means that people can’t structure their income to artificially lower their tax liability – after two Christchurch surgeons transferred their businesses into companies, paying themselves artificially-low salaries to avoid paying the 39 per cent top personal tax rate that applied at the time. 

The remaining company profits were distributed as dividends to family trusts – from which they and their families benefited. A lower tax rate applies to such distributions. 

“It’s not often that a tax case strikes fear into such a wide range of business owners,” Duncan says. 

“Whether you’re a doctor, builder or cafe owner, if your business is run by a company or trust that pays you a salary, you may be affected by this Court ruling.” 

Most business owners structure their operations and asset ownership through a company or family trust, or a combination of both – the key is to ensure that any business structure and profit distribution strategy is “genuine and demonstrable”, Duncan adds. 

“Although the IRD has indicated that small business owners shouldn’t fear a witch-hunt, it can be expected that any structures that have an element of artificiality and contrivance may be targeted.” 

Duncan adds: “The Court isn’t suggesting that companies must always pay ‘market salaries’, as there are many reasons why this may not be valid such as low or no profit, retaining funds in the company to fund asset purchases and the like.”