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Income Tax Act 2007

Avoidance and non-market transactions - Avoidance: specific

GB 23: Excessive remuneration to relatives

You could also call this:

“Rules for fair pay when employing relatives in a business”

This law is about making sure people don’t pay their relatives too much money when they work for them. If you run a business and you hire a family member, the amount you pay them needs to be fair. The same goes for companies that hire relatives of their directors or shareholders.

The law also applies if you’re in a business partnership or have a special type of company called a look-through company. If your business partner is a relative, or if you hire a relative to work for the partnership or company, their pay or share of the profits should be reasonable.

If the person in charge of taxes (called the Commissioner) thinks a relative is getting paid too much, they can step in. They can decide how much of the business income or losses should go to each person involved. They’ll do this without counting the extra money given to the relative.

When deciding if someone is paid too much, the Commissioner can look at things like what kind of work the relative does, how much they contribute to the business, and any other important factors.

If a company pays a director’s or shareholder’s relative too much, and the Commissioner changes this, the extra money is treated as if it were a dividend paid to the relative.

There’s another part of the law (section GB 24) that sometimes stops this rule from applying, but if that doesn’t apply, then this law about excessive pay to relatives does.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1516959.

Topics:

Money and consumer rights > Taxes

Business > Industry rules

Work and jobs > Worker rights

GB 22: Arrangements involving trust beneficiary income, or

“Rules for fair distribution of trust benefits to beneficiaries”

GB 24: Exemption for genuine contracts, or

“Genuine work and partnership contracts may be exempt from tax avoidance rules”

Part G Avoidance and non-market transactions
Avoidance: specific

GB 23Excessive remuneration to relatives

This section applies when—
a person carries on a business or undertaking; and
the person employs or engages a relative or, in a case in which the person is a company but not a close company, a relative of a director or shareholder of the company, to perform services for the business or undertaking; and
the Commissioner considers that the income payable to the relative for the services is excessive; and
the exemption in section GB 24 does not apply.

This section also applies when—
a person carries on a business in partnership or has an effective look-through interest for a look-through company; and
the partnership or look-through company employs or engages a relative of the person or, in a case in which the person is a company, a relative of a director or shareholder in the company, to perform services for the business; and
the Commissioner considers that the income payable to the relative for the services is excessive; and
the exemption in section GB 24 does not apply.

This section also applies when—
a person carries on a business in partnership; and
another partner in the partnership is—
1. a relative of the person; or
2. if the person is a company, a relative of a director or shareholder in the company; or
3. a company in which a relative of the person is a director or shareholder; and
the Commissioner considers that the other partner’s share of partnership profit or losses is excessive; and
the exemption in section GB 24 does not apply.

For the purposes of this Act, the Commissioner may allocate the income or losses of the business or undertaking among the parties to the contract or partnership as the Commissioner considers reasonable, without taking into account an amount provided to the relative or other partner.
An amount the Commissioner allocates to 1 person is treated as not belonging to another person.
The Commissioner may take into account each of the following matters when applying this section:
the nature and extent of the services rendered by the relative:
the value of the contributions made by the respective partners, by way of services, capital, or otherwise:
any other relevant matters.

If an amount provided by a company to a relative of a director or shareholder for services is allocated to the company under subsection (4), it is treated as a dividend paid by the company and derived by the relative.

Compare

2004 No 35 s GD 3(1), (2)

Notes

Section GB 23(2)(a): amended, on 1 April 2011 (applying for income years beginning on or after 1 April 2011), by section 67(1) of the Taxation (GST and Remedial Matters) Act 2010 (2010 No 130).
Section GB 23(2)(b): amended, on 1 April 2011 (applying for income years beginning on or after 1 April 2011), by section 67(2) of the Taxation (GST and Remedial Matters) Act 2010 (2010 No 130).
Section GB 23 list of defined terms effective look-through interest: inserted, on 1 April 2011, by section 67(3) of the Taxation (GST and Remedial Matters) Act 2010 (2010 No 130).
Section GB 23 list of defined terms look-through company: inserted, on 1 April 2011, by section 67(3) of the Taxation (GST and Remedial Matters) Act 2010 (2010 No 130).