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Income Tax Act 2007

Avoidance and non-market transactions - Avoidance: specific

GB 29: Attribution rule: calculation

You could also call this:

“How to work out income when someone provides personal services through a business”

This part of the law explains how to calculate income for a working person when they are connected to a company, trust, or partnership that provides personal services. Here’s what you need to know:

The working person’s income is the smallest of these three amounts:

  1. The money the connected entity made from personal services only.
  2. The total money the connected entity made.
  3. If the connected entity is a company or trust with past losses from personal services, it’s the money they made after subtracting those losses.

When figuring out how much money the connected entity made, there are some special rules:

  • If it’s a trust, pretend they didn’t give out any money to beneficiaries.
  • If it’s a partnership or a look-through company, treat it like a regular taxpayer.

The connected entity can subtract some things from their income:

  • Money they paid the working person as wages.
  • The value of any extra benefits they gave the working person, like a company car.

The amount of income can be reduced by:

  • Money the working person got from the trust as a beneficiary.
  • The working person’s share of profits from a partnership.
  • Dividends a company paid to the working person.

If the connected entity is a partnership that got free help with paperwork from someone related to them, the working person’s income is reduced by the value of that help.

If giving this income to the working person would cause the trust to lose money, the trust must reduce payments to other beneficiaries to balance it out.

If more than one working person is involved, the income is split based on how much work each person did.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1516979.

Topics:
Money and consumer rights > Taxes
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Part G Avoidance and non-market transactions
Avoidance: specific

GB 29Attribution rule: calculation

  1. A working person is treated as deriving income in an income year equal to the least of the following amounts:

  2. the associated entity’s net income for the corresponding tax year, calculated as if their only income were derived from personal services:
    1. the associated entity’s net income for the corresponding tax year:
      1. if and to the extent to which the associated entity is a company or a trust that has a loss balance to be carried forward under section IA 4 (Using loss balances carried forward to tax year) arising from a business or a trading activity of supplying personal services, the associated entity’s net income for the corresponding tax year after subtracting the loss balance carried forward from an earlier corresponding tax year.

        1. For the purposes of calculating the associated entity’s net income for the corresponding tax year in the application of subsection (1), section DC 8 (Attribution of personal services) is ignored.

        2. For the purposes of calculating the associated entity’s net income for the corresponding tax year in the application of subsection (1),—

        3. if the associated entity is a trustee of a trust, the trustees are treated as not having made a distribution of beneficiary income out of the year’s income:
          1. if the associated entity is a partnership, the associated entity is treated as a taxpayer and section HG 2 (Partnerships are transparent) does not apply:
            1. if the associated entity is a look-through company, the associated entity is treated as a taxpayer and section HB 1 (Look-through companies are transparent) does not apply.

              1. For the purposes of calculating the associated entity’s net income for the corresponding tax year in the application of subsection (1),—

              2. the associated entity is allowed a deduction for employment income paid to the working person during the income year:
                1. the associated entity is allowed a deduction for the taxable value of a fringe benefit provided or granted by the associated entity to the working person during the income year, and for the fringe benefit tax payable on the fringe benefit.

                  1. For the purposes of calculating the associated entity’s net income for the corresponding tax year in the application of subsection (1), the amount of net income of the associated entity for the corresponding tax year is reduced by—

                  2. in the case of a trustee of a trust, the amount of beneficiary income derived by the working person from the trust in the income year:
                    1. in the case of a partnership, the share of profits allocated by the partnership to the working person:
                      1. in the case of a company, a dividend paid—
                        1. by the associated entity to the working person during the income year or before the end of 6 months after the end of the income year; and
                          1. from income derived in the income year.

                          2. If the associated entity is a partnership that receives administrative services from another person related to their income from personal services and has not paid for the administrative services, the amount to be attributed to the working person is reduced by the market value of the administrative services provided by the other person.

                          3. If the associated entity is a trustee and the amount attributable would cause the associated entity to have a tax loss for the corresponding tax year, for the purposes of this Act,—

                          4. beneficiary income from the trust for the income year must be reduced to the extent to which the associated entity’s taxable income for the corresponding tax year is zero; and
                            1. the reduction in beneficiary income must be divided among the beneficiaries other than the working person—
                              1. according to proportions determined by the trust’s trustees:
                                1. if the trustees do not make the determination, according to the proportion that each beneficiary’s beneficiary income bears to the total beneficiary income from the trust for the income year.

                                2. If the amount attributable is to be attributed to more than 1 working person, the share attributed to each working person must reflect the respective value of the services personally performed by each working person.

                                Compare
                                Notes
                                • Section GB 29(1)(c): amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                • Section GB 29(1B) heading: inserted (with effect on 1 April 2008), on , by section 128(1) (and see section 128(2) for application) of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).
                                • Section GB 29(1B): inserted (with effect on 1 April 2008), on , by section 128(1) (and see section 128(2) for application) of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).
                                • Section GB 29(2)(b): amended, on (applying for income years beginning on or after 1 April 2011), by section 69(1) of the Taxation (GST and Remedial Matters) Act 2010 (2010 No 130).
                                • Section GB 29(2)(b): amended, on , by section 16(1) of the Taxation (Limited Partnerships) Act 2008 (2008 No 2).
                                • Section GB 29(2)(c): added, on (applying for income years beginning on or after 1 April 2011), by section 69(1) of the Taxation (GST and Remedial Matters) Act 2010 (2010 No 130).
                                • Section GB 29 list of defined terms look-through company: inserted, on , by section 69(2) of the Taxation (GST and Remedial Matters) Act 2010 (2010 No 130).