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How businesspeople can get around the 6c surtax

By Des Trigg

Friday 24th March 2000

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You are earning more than $60,000 a year. What are you going to do about the 6c surtax? As an employee? As a businessperson?

As an employee can you provide your services by way of a company which is not subject to the surtax? The first hurdle is to avoid the "Friday night/Monday morning syndrome;" where there is effectively no change to what you are doing but over the weekend you change from providing your services as an individual to providing your services as a company. It does not need Michael Cullen's proposed tax avoidance law to attack this one.

Unless you are providing your services to more than one company, you are unlikely to be considered an independent contractor (self-employed) rather than staff (employee). And if you are not an independent contractor, there is little likelihood of you operating as a company.

You could divert additional income into a superannuation scheme (taxed at 33%). It seems likely a genuine super scheme with investments locked in until retirement, will not be targeted.

If you are entitled to bonus or holiday pay, this should be paid before April 1.

What about the businessperson?

If operating as a sole trader, transferring the business into a company is obviously an option. However, there needs to be a real commercial rationale coupled with a need for asset protection (business and personal) that outweighs the perceived attempt to avoid the 6c surtax. New Zealand has become a more litigious country, so there really is no reason you ought not to protect what you have made to date by operating through a limited liability company.

As a businessperson, you will want to defer any expenditure and accelerate any income by March 31.

Where you are operating under a company structure, it is advisable to distribute any retained earnings (tax-paid profits) before April 1. If you are a client of a chartered accounting firm, suggestions will have been made that any terminal tax payment due on April 7 (for the 1999 income year) might be paid on or before March 31, 2000.

This will then allow a greater amount of retained earnings to be paid out, including the level of retained earnings after financial accounts have been completed for the year ended March 31, 2000. It is necessary, however, to have an appropriate resolution of shareholders predating April 1, 2000.

This will avoid having retained earnings paid out after April 1 when tax at 39c in the dollar will be charged on shareholders earning in excess of $60,000 per annum, while the imputation credits attached to that distribution will only be at 33%. This ensures maximum retained earnings distributed before April 1 have tax advantages for those earning in excess of $60,000 per annum.

Des Trigg is a tax partner at Spicer & Oppenheim, Auckland

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