Drawings versus Salaries

There is always a lot of confusion around this matter. Essentially there are three options.

 

1) The company pays a PAYE salary/wage to the working shareholder/s. The advantages are

a) Covered for ACC based on salary and no ACC complications

b) Personal tax paid as you go so no nasty surprises

c) You would normally pay a working shareholder $38,000 or more to take advantage of the lower 18.89%(incl ACC) tax rate.

d) Companies have to be able to justify what they pay shareholders. ie can't work 1 hour per month and get paid $38,000, its not realistic or a fair market rate.

This is always a preferred option, even if the salary is low to start with to allow for uncertain profitability of the company. You can also increase it later in the year.

 

2) Keep the profits in the company and it will pay 28% at the moment. If the shareholder has previously loaned in money, then the company can repay this debt and the shareholder won't have to pay tax. If the shareholder current account becomes overdrawn then the company must charge the shareholder interest at the FBT rate. This interest income will be taxable to the company but non deductible to the individual. The retained profits would normally be passed to the shareholders as tax paid dividends with 28cents imputation credits. A Divident Witholding Tax will need to be paid at the time of dividen declaration. If the shareholder is a Trust, then the tax should be fully paid.

 

3) The last option is for the shareholder to take drawings throughout the year and then after the year end accounts are finished allocate the shareholder a shareholder salary (NOTE - not a directors salary as this must have PAYE deducted).

For FBT and tax purposes the salary is credited on the first day of the income year. So Joe bloggs takes $1,000 per week in drawings, so $52,000. His opening current account is $0. At the end of the year Joe decides to allocate himself a $60,000 shareholder salary. So there will be no interest charged on an overdrawn current account as it starts with the $60,000 salary and is slowly reduced to $8,000 at the end of the year. Joe would then have to pay personal tax on the $60,000 and most likely be liable for provisional tax (rental losses etc could change this).

A common problem with this is one year you may only allocate $30,000, then the next year you allocate $60,000. This results in a large tax bill due 7/4/2017 (for 31/3/2016 year) as the provisional tax would have been paid based on $30,000 and most likely a big provisional tax bill due on the 7/3/2017 as the next years provisional tax will be based on the $60,000.

In any case - talk to us so that we can advise what the best option might be for you based on your particular situation.

 

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