Companies and tax

Company taxation

New Zealand resident companies pay New Zealand income tax on their world income. Non-resident companies are subject to tax on the income generated in New Zealand. A company is a body corporate or other entity with a legal personality as distinct from its members. It can include a unit trust.

Companies pay income tax at the rate of 28% for income years 2012 and later and 30% for income years 2009 – 2011. This applies to both resident and non-resident companies.

Tax residency for companies

A company is resident in New Zealand if it meets any of the following criteria.

  • Incorporated in New Zealand. This is a company which is registered under New Zealand’s Companies Act 1993 and is resident in New Zealand.
  • Controlled by Directors. This is where the directors control the company here in New Zealand.
  • Centre of management in New Zealand. This is the place from where the company as a whole is managed from day to day. The focus is on the location of the centre of management of a company.
  • Head office in New Zealand. The head office is the place from where the business of the company is directed. The focus is on the physical location of administration and management.

If your company is a resident in New Zealand it will need to apply for an IRD number. This is done by completing an IRD number application – non-individual form (IR596) and lodging it with IRD.

 

Companies who don’t meet tax residency requirements

If a company doesn’t meet the conditions set out above, they still qualify as a NZ resident for GST purposes if they carry on their business activities from a fixed or permanent place in NZ.

The following points confirm a fixed or permanent place in NZ:

  • The place is an actual area for business – such as a factory, office, quarry etc.
  • The place has an operational area that is clearly identified
  • The place is not simply a promotional office, storage or display facility.
  • The place is being used in a productive manner for business activity

Applying for an IRD number for your company

If your company is deemed to be a resident of New Zealand, it will need to apply for an IRD number by completing an: IRD number application – resident non-individual (IR596) form.


Taxation of company profits

Profits derived by a company are taxed at the company tax rate of 28 cents in the dollar.

Companies can distribute money in 3 ways:

  1. Shareholder-employees can periodically draw money from the company. At the end of the year, the company calculates a salary amount on which the shareholder will have to pay income tax.
  2. Shareholders who are also employees of the company can be paid a salary with PAYE taken out in the normal way. These salaries are deductible as a business expense for the company.
  3. The company can pay dividends to shareholders out of the profits that remain after tax. It may also attach tax credits to these dividends called imputation credits.

What is a company for tax purposes?

For tax purposes a company is defined in the Tax Act as; “Any body-corporate whether incorporated in New Zealand or elsewhere” and includes anything deemed to be a company for the purpose of the Act.

This definition of a company is added to by additional legislation which was enacted in 1994 as part of the wider reforms to company tax.

These were:

  • Close company: A close company for tax purposes is one where there are five or less natural person shareholders whose total voting interest or total market value in the company is greater than 50%.
  • Closely held company: A closely held company is a company where there are five or less persons (associated persons of an individual will count as one individual) whose total direct voting interest or total direct market value interest is greater than 50%.
  • Widely held company: A widely held company is any company which as no less than 25 shareholders and is not a closely held company.
  • Limited Attribution Company: This type of company is a building society or a co-op company. So this type of company is either; a building society, or a co-op company, a listed company, a widely held company, or a limited attribution foreign company.
  • Other companies: include limited attribution foreign company, listed company, qualifying and loss attributing qualifying companies, special corporate entities.

Any company that is a New Zealand resident becomes one if it is incorporated, or has its head office or central management in New Zealand, or is controlled by its directors and that control is exercised in New Zealand.

This requirement brings more companies within the New Zealand tax jurisdiction because it includes in the company’s gross income all attributed foreign income from other sources. Any company resident in New Zealand or which has income from New Zealand is subject to tax in this country.

 

How company tax is calculated

The tax that is payable by a company for any particular income year will be determined by multiplying the company rate of tax against the taxable income of the company. This will produce a tax liability against which allowable rebates can be deducted and any surcharges that apply added.

The result will be the company’s income tax liability against which credits for tax already paid can be offset. If the total credits exceed the company’s tax liability, then they are first to be set off against other outstanding tax liabilities that the company may have, and any remaining excesses offset in the following order:

  • Non-refundable credits (any available credits from the branch equivalent tax account or policy holder credit account, or credits for foreign tax paid).
  • Credits for supplementary dividends paid under the foreign investor tax credit regime.
  • Convertible credits (imputation credits etc).
  • Refundable credits (provisional tax etc).

These rules were designed to maximise the credits received for foreign taxes and other amounts which are capped at the level of the domestic tax liability.

 

Company tax losses

New Zealand companies are permitted to carry forward any losses for tax purpose from one income year and offset it against the taxable income of a future year. This is permitted as long as they maintain a 49% continuity of ultimate individual shareholding.

Tax loss grouping provisions permit offsets where the same group of companies obtain tax benefits of the loss offset. A group of companies is formed for tax purposes if the companies have a minimum 66% common shareholding throughout the relevant tax period. New Zealand resident companies that are 100% commonly owned can consolidate for tax purposes. Group members are taxed as if they were a single company.

What are qualifying companies?

Closely held New Zealand resident companies can choose to become a qualifying company (QC). This provides them with the ability to access capital gains made by QC free of tax. Some QCs can attribute tax losses to their shareholders.


Company tax and distribution

Companies can distribute money in 3 ways:

  1. Shareholder-employees can periodically draw money from the company. At the end of the year, the company calculates a salary amount on which the shareholder will have to pay income tax.
  2. Shareholders who are also employees of the company can be paid a salary with PAYE taken out in the normal way. These salaries are deductible as a business expense for the company.
  3. The company can pay dividends to shareholders out of the profits that remain after tax. It may also attach tax credits to these dividends called imputation credits.

Profits derived by a company are taxed at the company tax rate of 28cents in the dollar. Simply multiply the taxable income amount by .28c to arrive at the tax.


How are dividends not taxed?

The dividend imputation system removed the old problems of double taxation of company profits. The old difficulties arose when the company paid tax on the dividends issued to its shareholders and then the shareholders paid tax again when the dividends were declared as part of their income in their individual tax returns.

The new system now means that dividends are ‘imputed’ with the tax that is already paid by the company on its profits (distributed as dividends) so that shareholders were able to offset the credit for this imputed tax against their own tax liability on that income.

A New Zealand resident is not entitled to the benefit of any imputation credit under a foreign tax system. However, from 1 October 2003 a New Zealand resident who receives dividends from an Australian resident company was able to benefit from New Zealand imputation credits.

Filing company tax returns

Every company (except certain non-active companies) have to file a return of income for each income year. This is filed on the IR5 form and must be accompanied by a copy of the company’s statement of financial position (profit & loss accounts and balance sheets) plus whatever other forms are necessary to answer the matters addressed in the IR4 tax form.

The time by which the company’s tax return has to be filed will depend upon the company’s balance date. The tax return must show the company’s worldwide income if it is a resident company and only the income derived in New Zealand if it is a non-resident company.

If the company has been liquidated, it needs to file a return from the period which was the beginning of the income year to the date of liquidation or dissolution.

 

Main issues of expense deductibility

The deduction from gross income that is permitted will depend on whether the expenditure or loss is incurred and derived in gross income. If the taxpayer derives income from investments, for example, then he or she will be allowed a deduction for any expenses incurred in gaining that investment income, such as, consultant’s fees etc, which are directly related to deriving the investment income.

The deduction could also be permitted where any expenses or losses are necessarily incurred in carrying on the business for the purpose of deriving gross income. In this case the expenditure or loss has to be related directly to the carrying on of the business, but does not necessarily have to relate to any particular item of income.

All the taxpayer has to show is that the business in which the expenditure or loss was incurred was carried on for the purpose of deriving income. Expenditure or loss is deducted from the total gross income in the income year in which the expenditure or loss was incurred, provided the Act does not require that deductibility to be deferred.

In essence, the taxpayer has to be committed to the expense, otherwise it cannot be said to have been incurred.

 

Points in tax law for allowable company deductions

The Income Tax Act and the Tax Administration Act are the legislation that permits the deduction of all expenses or outgoings incurred in gaining the assessable income, as well as all costs that are necessarily incurred in conducting the taxpayer’s business.

Expenses of a capital or private nature, as well as domestic expenses, are not allowable as a deduction by the Act.

Some of the important points that arise from legislation are:

  • For the expenses to be allowable, they have to be incidental and relevant to gaining or producing the income.
  • The expenses must not be of a private or capital nature, otherwise they are not deductible.
  • Any expenses that are partly business and partly non-business must be apportioned accordingly.

From an examination of the Acts, as well as relevant court cases, it would appear that it is not necessary for the taxpayer to show that the expenses were incurred for the purpose of gaining an income.

It is sufficient for the taxpayer to show that the expenses were incurred while producing the assessable income and that it was reasonably incidental and relevant to deriving it.

The taxpayer does not have to show that they were compelled to undertake the expenditure.

What are capital & revenue expenses?

According to tax law only revenue type expenses are allowed as tax deductible. Rather than trying to explain this complex part of tax law, it may be best just to define the terms involved as this may illustrate the difference between capital and revenue more easily.

  • Capital Expenses: This includes the purchase of assets with some value in a useful life of more than 12 months. It generally includes such costs as setting up in business, or putting yourself in a position to earn income.
  • Revenue Expenditure: This can be defined as that of the everyday recurring expenses involved in the business.

The Income Tax Act specifically sets out that no deduction will be allowed for any expenditure or loss to the extent that it is of a capital nature.


Tax rates for companies for 2017

Profits earned by a company except for profits of a LTC are taxed at the company tax rate of:

  • 28 cents in the dollar for income years 2012 and later.
  • 30 cents in the dollar for income years 2009 to 2011.
  • 33 cents in the dollar for income years 2008 and earlier.


Who pays income tax at the company rate?

The company tax rate (CTR) applies to all:

  • registered companies, except for those who elect to become a LTC
  • cooperative companies
  • life insurance companies deadline
  • incorporated societies
  • portfolio investment entity (PIEs) that are not portfolio tax rate entities
  • specific savings vehicles defined as being taxed at this rate in Schedule 1 of the Income Tax Act 2007
  • unit trusts
  • statutory producer boards
  • group investment funds (except for certain income)

 

When a company has a tax loss

If a company’s total expenses exceed its total income, it will generally have a loss for tax purposes. Companies in a loss position do not have to pay income tax. If certain requirements are met the company may be able to:

  • transfer the loss to another company or
  • carry it forward to the next tax year for offset against the company’s income in that year

Unless the company is an LTC, the company will not be able to pass this loss to shareholders.

Loss attributing qualifying companies (LAQCs) can no longer attribute losses to their shareholders from their first income year starting on or after 1 April 2011. This means in effect LAQCs no longer exist and will default to being taxed as a qualifying company (QC).

Any losses the company has must be carried forward, or transferred to a shareholding QC if certain requirements are met.

Major shareholder in a close company – attributed income

From 1 April 2014 there were changes made to the calculation of income, so there are two sets of calculations. Please ensure you use the correct rules. If you’re a major shareholder in a close company, on the last day of the company’s income year, you may need to include income earned by the company as income for Working for Families Tax Credits (WfFTC) and student loans.

If your spouse/partner is a major shareholder in a closed company, they may also need to calculate if any income earned by this company needs to be taken into account in working out your family’s WfFTC entitlement. You may also have to include the voting interests (shares) of dependent children.

Who a major shareholder in a close company is

A major shareholder in a close company is anyone who:

  • owns, or has the right to acquire, at least 10% of the ordinary shares of the company, or
  • has power to control, directly or indirectly, at least 10% of the ordinary shares of the company, or
  • owns, or has the right to acquire, at least 10% of the voting interests in the company, or
  • has power to control, directly or indirectly, at least 10% of the voting interests in the company, or
  • has, in any other way, 10% or more of the control of the company


Calculating the amount to be treated as income for 2016 tax years onwards

You’ll need the following information to do the calculation:

  • company’s net total income for the company’s income year
  • total dividends paid by the company for the company’s income year
  • voting interests held in the company on the last day of the income year
    • by you
    • by your dependent children
  • total number of company shares on the last day of the income year


New financial reporting for companies

For income years starting on 1 April 2014 and later companies (including look-through companies) with:

  • annual revenue of $30 million or less, and
  • assets of $60 million or less

.. Must prepare financial accounts that meet our minimum financial reporting requirements. These thresholds apply to all companies in a group where the parent company is incorporated in New Zealand.

For subsidiaries of multi-national companies the levels are:

  • annual revenue of $10 million or less, and
  • assets of $20 million or less


What are the minimum financial reporting requirements?

The financial statements must consist of:

  • A balance sheet setting out the assets, liabilities, and net assets of the company as at the end of the income year.
  • A profit and loss statement showing income derived, and expenditure incurred, by the company during the income year.
  • A statement of accounting policies setting out:
    • the policies and assumptions that have been applied or changed, and
    • a description of the effect of any material changes in accounting policies used since the previous income year

The statements must comply with the following accounting principles:

  • double-entry method of recording transactions, and
  • accrual accounting

Small companies are not required to prepare financial accounts if during the income year they:

  • are not part of a group of companies, and
  • haven’t derived income in excess of $30,000, and
  • haven’t incurred expenditure in excess of $30,000

Tax records must be kept to calculate taxable income, expenses, and GST (if you’re registered). If a small company is also an employer records for employment-related taxes will also need to be kept.

Non-active companies are not required to prepare financial reports.


Companies who need to file an IR4 return

Generally all active companies must file an IR4 income tax return each year.  This includes:

  • New Zealand resident companies
  • body corporates registered under the Unit Titles Act 1972 – even if it’s a nil return
  • unit trusts – even if it’s a nil return

 
Companies who don’t need to file an IR4 return

If your company is non-active you do not have to file a return.

Exceptions to filing an IR4 income tax return are:

  • The company/body corporate is non-active and has filed an Non-active company declaration (IR433) which applies from the start of the relevant financial year (or earlier).
  • The company is a member of a consolidated group.
  • The company/body corporate was struck off before the start of the relevant financial year.
  • A non-resident company with no permanent establishment or centre of management in New Zealand is not required to file IR4 income tax returns.

 

If your company has stopped trading

If you’re no longer trading you may apply for an exemption from filing tax returns by completing a Non-active company declaration (IR433) form and sending it to us.

A non-active company is a company that has:

  • not derived any gross income
  • no deductions
  • not disposed of any assets
  • not been party to any transactions that during the year gave rise to:
  • gross income for any person, or
  • fringe benefits to any employee or any former employee, or
  • a debit in the company’s imputation credit account or FDP (foreign dividend payment) accoun.

If your application is accepted, you’ll no longer be required to file tax returns or prepare financial reports until your company is reactivated. If you don’t have an exemption then you must file a return, otherwise you will be charged a late filing penalty.

If you’re closing down your business there are a lot of things to do to ensure you’re still meeting your tax obligations.

 

2017-08-28T01:20:13+00:00