There is a general need for a business to pay associated employees a fair market salary for their personal service. Given the implementation of a 39% personal marginal income tax rate on income over $180,000 from 1 April 2021, Inland Revenue's scrutiny of such salaries is expected to increase. This has been confirmed through Inland Revenue issuing two related documents in March 2021 in quick succession, namely:
Both of which are aimed at warning taxpayers against the use of associated entities or family members, to avoid the highest personal income tax rate on income from the supply of services that they personally perform.
For example, surgeons or consultants operating through a company.
We have seen instances where the same flat salary amount is allocated annually to working shareholders for numerous years, without an annual review of that salary nor a comparison to market. Hence, it is a timely reminder to review salaries paid to associated employees, to ensure they reflect current market conditions.
As with any tax position, best practice would be to document the rationale for the allocated salary (e.g. market data or a file note), to evidence reasonable consideration and care has been taken.
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