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Income Tax Act 2007

Deductions - Employee or contractor expenditure

DC 2: Pension payments to former employees

You could also call this:

“Tax deductions for pensions paid to former employees who retired or were made redundant”

If you run a business, you can deduct money from your taxes for pensions you pay to former employees. This applies if the employee retired or lost their job due to redundancy. The pension must be part of an agreement that lasts for a set time or for life. It can also cover the employee’s spouse or partner until they start a new relationship.

If you own a close company (a company with few shareholders), you can still deduct pension payments for former employees who were shareholders or related to shareholders. However, their work for the company must have been real, and they must have retired or lost their job due to redundancy. The amount you can deduct is what you would have paid if the person wasn’t a shareholder or related to one.

You can deduct these pension payments in the same year you make them. This rule adds to the general permission for tax deductions and overrides the capital limitation, but other general limitations still apply.

There’s more information about pension payments to former employees in Section FB 11.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1513760.

Topics:
Money and consumer rights > Taxes
Work and jobs > Worker rights
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DC 1: Lump sum payments on retirement, or

“Explaining when businesses can claim deductions for retirement and redundancy payments”

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DC 3: Pension payments to former partners, or

“Tax deductions for reasonable pension payments to retired former business partners or their spouses”

Part D Deductions
Employee or contractor expenditure

DC 2Pension payments to former employees

  1. Subsection (2) applies when—

  2. a person, other than a close company, carries on a business; and
    1. a former employee has retired from their employment in the business or their employment has ended through redundancy or similar circumstances; and
      1. they are paid a pension in consideration of their past services in the business; and
        1. they or their spouse, civil union partner, or de facto partner has a right to receive the pension under a deed for a fixed period or for life or, in the case of the spouse, civil union partner, or de facto partner, until the spouse, civil union partner, or de facto partner enters a new marriage, civil union, or de facto relationship.

          1. The person is allowed a deduction for a reasonable amount paid as the pension to the former employee or their surviving spouse, civil union partner, or de facto partner.

          2. Subsection (4) applies when—

          3. a close company carries on a business; and
            1. a former employee of the company is or has been a shareholder in it or has a relative who is or has been a shareholder in it; and
              1. the former employee’s employment in the company was genuine; and
                1. they have retired from the employment or their employment has ended through redundancy or similar circumstances; and
                  1. they are paid a pension in consideration of their past services in the business; and
                    1. they or their spouse, civil union partner, or de facto partner has a right to receive the pension under a deed for a fixed period or for life or, in the case of the spouse, civil union partner, or de facto partner, until the spouse, civil union partner, or de facto partner enters a new marriage, civil union, or de facto relationship.

                      1. The close company is allowed a deduction for the amount paid as the pension to the former employee or their surviving spouse, civil union partner, or de facto partner.

                      2. The amount of the deduction allowed under subsection (4) is the amount that the company would have paid if the former employee or their relative were not, or had not been, a shareholder in the company.

                      3. A deduction under this section is allocated to the income year in which the amount is paid.

                      4. Section FB 11 (Pension payments to former employees) expands on this section.

                      5. This section supplements the general permission and overrides the capital limitation. The other general limitations still apply.

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