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  • A Company and Distribution of Profits

    Being in the process of setting up a company, I suddenly realised
    I had no idea about the ways in which a company can deal with
    any 'profit' distribution, or the tax implications of the options.

    Can someone please enlighten me?

    The company will effectively be the PM entity, leasing rentals from
    a Trust (for an arms length lease fee) which it will then sub-lease
    to tenants: both residential and commercial.
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  • #2
    You have many options for the "distribution of profit" Many of these are not even profit, including
    1. Payment of salary which will have PAYE removed,and potentially company kiwisaver payments ,to you or perhaps your partner for services. (often paying the lowest earning person would be advantageous although this whole route of salaries adds alot of tax complexity)
    2. Drawings
    2. Payment of the trust through greater lease payments, within reason, (if you want profits in the trust)
    3. leave the profit in the company which will only pay 28% tax and invest them in other wealth creating activity
    4. Pay dividends. (usually take withholding tax at owners marginal rate)
    Last edited by [email protected]; 20-02-2012, 11:11 AM.
    Doug

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    • #3
      Another option, amongst the many of which can be used either singly or in multiples, is you could sell the assets the PM company needs into it for debt back (for example, a car used to visit the properties), and take out profits by paying interest and if desired repaying the debt.

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      • #4
        I'm familiar with the 'drawings' concept in a self-employed
        situation. Is it the same for a company? As in an end-of-
        year wash-up, rather than being treated like wages/salary
        for month-by-month tax liabilities?
        Want a great looking concrete swimming pool in Hawke's Bay? Designer Pools will do the job for you!

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        • #5
          Yes drawings can be taken at any time but would be considered as part of the profit if available or perhaps a loan to the share holder if the profit wasn't available. If you didn't want to get into provisional tax you would have to pay tax during the year on any profit. I do not know if this could all be paid in March but I expect so.
          Doug

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          • #6
            Originally posted by [email protected] View Post
            Yes drawings can be taken at any time but would be considered as part of the profit if available or perhaps a loan to the share holder if the profit wasn't available. If you didn't want to get into provisional tax you would have to pay tax during the year on any profit. I do not know if this could all be paid in March but I expect so.
            The easiest way is to take drawings out during the year. At the end of the year you declare a shareholder salary to offset the drawings.
            The shareholder salary is then included in your personal return.

            NB: You can not have both shareholder salary and PAYE wages. It is one or the other.

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            • #7
              Are personal drawings from a company double-taxed?

              Scenario:
              Owner has a registered company (single owner-shareholder, separate IRD# from personal, registered for GST, etc.)
              Company makes 100K net profit during the year.
              Owner draws money out during the year as personal drawings (let's say the full 100K)

              Come end of tax year:
              Company has to pay income tax of 33% on 100K net profit (including drawings) = 33K

              Owner has to pay personal income tax on 100K income/drawings (effective rate of 23.xx) = 23,920.00

              Total tax paid = 33K + 23K = 56K = 56% tax ?

              What's not correct above?




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              • #8
                Originally posted by lukasr View Post

                What's not correct above?

                Assume that the fellow has worked full time in the company, and his work is worth 100K.
                Then obviously the company has not made a profit. They have just paid him the 100K he has earned.

                The answer to your question is that his earnings are classed as wages/salary, and are therefore just as tax-deductible to the company as if they had been paid to any other employee.
                So the company pays no tax, the owner pays income tax.

                There is a different scenario of course if he takes 90K and 10K stays in the company.
                In that case there is income tax on the 90K and company tax on the 10K.

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                • #9
                  Ok, what if the company is not registered as an employer?

                  What I don't understand is how can the drawings (which are part of net income for a company and not deductable) just become salary (which is a tax deductable expense).

                  Also, I am assuming it is up to the company to then go and arrange for ACC etc to be paid as well once the above "conversion" takes place.

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                  • #10
                    I'm not an accountant, but assuming by drawings you mean the company is paying a dividend to its shareholders, then wouldn't the shareholders get an imputation credit?

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                    • #11
                      No, I mean drawings as in #1 under How can a company distribute its profits? in

                      http://www.ird.govt.nz/yoursituation...ompanytax.html

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                      • #12
                        Are you talking about method 1 - if so then the amount paid by company to shareholder is deductible by the company for income tax, and the shareholder pays the tax.

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                        • #13
                          After the end of the financial year, a company can allocate a shareholder salary. From a shareholder current account perspective, this goes on the 1st day of the financial year, and then drawings come out of the funds.

                          So if company allocates whole $100k profit to shareholder (note must be a shareholder!), then $0 profit in the Company, and $0 company tax.

                          If profits are retained in the Company, then become retained earnings of Company. These get allocated out as dividends. As the company is only taxed at 28% in 2012, then if a dividend is completed, the Compay must pay 5% RWT to bring the tax credit up to 33%.

                          I suggest you get some accounting advise if you are trying to complete your own tax return.

                          Ross
                          Book a free chat here
                          Ross Barnett - Property Accountant

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                          • #14
                            Once the tax returns are filed, this information is passed onto ACC and they will bill ACC based on the shareholder salary amount.

                            Ross
                            Book a free chat here
                            Ross Barnett - Property Accountant

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                            • #15
                              Originally posted by Rosco View Post
                              and they will bill ACC
                              My oath they will!
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