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Income Tax Act 2007

Avoidance and non-market transactions - Avoidance: specific

GB 25: Close company remuneration to shareholders, directors, or relatives

You could also call this:

“Rules for paying shareholders, directors, or their relatives in a close company”

This law is about how much money a close company can pay to certain people for their work. It applies when the company pays someone who is a shareholder, director, or a relative of a shareholder or director.

If the government thinks the company is paying too much, they can treat the extra money as a dividend. This means the person who got the money might have to pay tax on it as if it were a dividend, not just normal pay.

However, there are some cases where this law doesn’t apply. If the person getting paid is an adult working full-time for the company, helps run the company, their pay isn’t influenced by their relationship to a shareholder or director, and they live in New Zealand, then the government won’t treat any extra pay as a dividend.

The government wants to make sure companies aren’t using high pay to avoid taxes or give unfair benefits to people connected to the company. But they also recognise that sometimes family members or shareholders can be valuable employees who deserve good pay.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1516963.

Topics:
Money and consumer rights > Taxes
Business > Industry rules
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“Genuine work and partnership contracts may be exempt from tax avoidance rules”

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GB 25B: Excessive effective look-through interests, or

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Part G Avoidance and non-market transactions
Avoidance: specific

GB 25Close company remuneration to shareholders, directors, or relatives

  1. This section applies when—

  2. a close company provides remuneration for services to a person (the service provider) who is—
    1. a shareholder or director of the company; or
      1. a relative of a shareholder or director of the company; and
      2. the Commissioner considers that the amount provided is excessive; and
        1. the exemption in subsection (3) does not apply.

          1. For the purposes of this Act, the excess is treated as a dividend paid by the company and derived by the service provider.

          2. This section does not apply when—

          3. the service provider is an adult employed substantially full-time in the business of the company; and
            1. the service provider participates in the management or administration of the company; and
              1. the amount provided to the service provider was not influenced by their relationship with a shareholder or director; and
                1. the service provider is a New Zealand resident.

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                  Notes
                  • Section GB 25(3)(b): amended (with effect on 1 April 2008), on (applying for the 2008–09 and later income years), by section 53(1) of the Taxation (Annual Rates, Trans-Tasman Savings Portability, KiwiSaver, and Remedial Matters) Act 2010 (2010 No 109).