Making a profit is always satisfying. On the flip side, profits are almost always taxable. Inland Revenue is becoming more focused on the answer to the question – who pays the tax?

The top tier tax rate of 39% for individuals came into play from 1 April 2022. Given that a company’s profit is taxed at a flat 28%, trust profit has a maximum tax rate of 33% (potentially 39% from 1 April 2024), and trust beneficiaries may have a tax rate as low as 10.5%, business owners could be tempted to reduce their overall tax bill by operating as a company by leaving profit in the company, splitting the profit between shareholders, and/or ‘diverting’ the profit into a trust.

Let’s strip out all of the legalese, ignore the most unlikely of scenarios and exemptions, and consider the following (very real) situation.

Personal services income

A shareholder performs most of the work to generate 85% of the company’s total revenue. It has one customer. If the shareholder earned that income as a sole trader, profit would be taxed at the individual’s tax rate. The individual would be paying at least 30% on profit above $48,000. If the same business operations were undertaken through a company structure, profit would be taxed at only 28%. That’s clearly a way to save substantial amounts of tax.

To combat this, Inland Revenue developed its ‘income attribution rule’. That is – which entity should pay tax on the company profit?

Attribution rules – the basics

If all of the following apply in your company, business profit is considered to have been earned by the shareholder. As a result, the company’s profit is ultimately included in the individual’s income tax return and called ‘shareholder salary’.

  • A company provides personal services to a third party; and
  • At least 80% of the company’s revenue comes from that third party; and
  • At least 80% of company revenue comes from personal services performed by a shareholder; and
  • The net profit of the company is higher than $70,000.

Level of remuneration

Even if the attributions don’t apply, Inland Revenue also looks at how much is being paid to shareholders.

  • Shareholders can only receive a shareholder salary if they perform work for the company
  • The salary needs to be in line with the level of work performed and market rates

Impact of low remuneration

In addition to paying less tax, there are other reasons for taxpayers wanting to reduce their personal income.

Personal income has an impact in the calculation of:

  • Child support payments
  • Student loan repayment obligations
  • Working For Families Tax Credit

Real life – Penny and Hooper legal case

The Supreme Court’s decision in Penny and Hooper v CIR [2011] is considered to be the leading authority on the remuneration matter.

Two surgeons (Penny and Hooper) had operated individual practices as sole traders. They decided to restructure their businesses to be in the form of companies with the shareholders being family trusts. The surgeons became employees of their respective companies and agreed total salaries of $220,000. If they had operated as sole traders, their taxable profit would be a total of $1,399,000. The difference of $1,179,000 was either taxed in the company (28%) or paid as dividends income to the trust (33%).

The trading structure was a choice they were entitled to make. Income tax was paid correctly by the individuals, companies, and trusts. However, the issue was the the amounts of salaries paid to the surgeons. There is actually no legislation specifying the level of remuneration. However, Inland Revenue used its general anti-avoidance position and determined the salaries were well below market rates and that the structure was put in place to avoid tax. The Supreme Court agreed with them.


Inland Revenue’s stance is pretty clear and aligns with the government’s objective that everybody (and every entity) pays their fair share of income tax. Although Inland Revenue now has more information at its disposal than ever before, the general feeling of the NZ public is that the objective is still very much a work in progress.

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