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Thread: Setting up a company and complying with attribution rule

  1. #1
    Join Date
    Jan 2013
    Location
    New Zealand
    Posts
    17

    Default Setting up a company and complying with attribution rule

    Hi all,

    I've a couple of questions/confusions which I want to clear. I am also going to consult an accountant but want to get suggestion from wider audience as well. Most of it is related to attribution rule and complying with it.

    1) Can I setup a company with just one client (one source of income), have my wife as a shareholder, start paying her wage for administration work that she will be doing and make sure I comply with attribution rule by end of fiscal year ?
    Some of my colleagues say I can start as a company with just one employer but make sure to comply by end of fiscal year.

    2) In such condition, Will the company comply with attribution rule if, by the end of the fiscal year,

    i) I took second job and am only the one generating income for company and,

    a) None of the two jobs I do yield 80% or more income, and

    b) my wife is just doing administration work for company and not generating any income for company herself.

    ii) My wife generates at least 20% income through overseas client or another local client.

    iii) I take on second job and generate some income, my wife generates some income, and the combined income of these two is 20% or more?

    3) What will happen if the company fails to comply with attribution rule? Will the company face legal issue? or is it that at the end, IRD will say all of income will be taxed at individual tax rate and I'll have to pay according to that?

    4) Any regulations on how much I might be able to pay my wife, given that it's not clear at this time whether/how much income she will be generating for company?

    Your response will be much appreciated.

    Thanks
    Sandeep
    Last edited by sandeep.nakarmi; 10th May 2014 at 03:01 PM.

  2. #2
    Join Date
    Nov 2012
    Location
    New Zealand
    Posts
    34

    Default

    Quote Originally Posted by sandeep.nakarmi View Post
    Hi all,

    I've a couple of questions/confusions which I want to clear. I am also going to consult an accountant but want to get suggestion from wider audience as well. Most of it is related to attribution rule and complying with it.

    1) Can I setup a company with just one client (one source of income), have my wife as a shareholder, start paying her wage for administration work that she will be doing and make sure I comply with attribution rule by end of fiscal year ?
    Some of my colleagues say I can start as a company with just one employer but make sure to comply by end of fiscal year.

    2) In such condition, Will the company comply with attribution rule if, by the end of the fiscal year,

    i) I took second job and am only the one generating income for company and,

    a) None of the two jobs I do yield 80% or more income, and

    b) my wife is just doing administration work for company and not generating any income for company herself.

    ii) My wife generates at least 20% income through overseas client or another local client.

    iii) I take on second job and generate some income, my wife generates some income, and the combined income of these two is 20% or more?

    3) What will happen if the company fails to comply with attribution rule? Will the company face legal issue? or is it that at the end, IRD will say all of income will be taxed at individual tax rate and I'll have to pay according to that?

    4) Any regulations on how much I might be able to pay my wife, given that it's not clear at this time whether/how much income she will be generating for company?

    Your response will be much appreciated.

    Thanks
    Sandeep

    There are effectively two attribution rules to consider. The first is the Personal Services Attribution(PSA) rule and the second is the Penny Hooper principle.

    The PSA rule only applies where all of the following tests are met (the tests below are verbatim from the tax legislation):

    Threshold for application of attribution rule


    (2) The attribution occurs only if—

    (a) 80% or more of the associated entity’s total income from personal services during the income year is derived from the sale of services to the buyer, a person associated with the buyer, or a combination of them; and


    (b) 80% or more of the associated entity’s income from personal services during the income year is derived through services personally performed by the working person, a relative of the working person, or a combination of them; and


    (c) the working person’s net income for the income year, assuming section GB 29 applies in relation to the associated entity and working person, is more than $70,000; and


    (d) substantial business assets are not a necessary part of the business structure that is used to derive the total income referred to in paragraph (a).

    If your company derives income from two unrelated customers, where one is more than 20% of the total gross income, then the PSA rule will not apply. Because of (b) above, it does not matter who does the work (between you and your wife). You need to measure the 80% tests based on a full fiscal year.

    If the company meets the PSA rule, then the net income from the company (from those personal services) is attributed to you for tax purposes and you have to pay the tax, not the company.

    If your wife is a shareholder-employee, she can be paid a market wage for the work she does (either with PAYE deducted or on a No-PAYE/provisional tax basis).

    You could also consider whether the Look-Through Company (LTC) regime may provide a better tax outcome if the PSA rules do not apply.

    The second attribution rule (Penny Hooper) is not explicitly stated in the tax legislation but is based on a tax case in which (in very broad terms) the Court held that income arising from a person's personal efforts should generally be taxed in that person's hands. Even if the PSA rule did not apply, you would need to consider if the Penny Hooper principle required income from your efforts to be returned in your name.

    Chris

    PS I am a tax accountant

  3. #3
    Join Date
    Jan 2013
    Location
    New Zealand
    Posts
    17

    Default

    hi chris,

    Thanks for your response.

    So, at the end of fiscal year, if company falls under PSA, i will have to pay tax on gross income. Is that all? or will there be other issues for company for not meeting this criteria? e.g will company have to be closed?

    Also, as i mentioned, i have only one client at the moment and haven't registered as company yet. Can i still register and start trading as company, and employ and pay wage to my wife as a shareholder-employee with the anticipation that there will be more clients in future and income which will take company out of PSA? Even if it does not work out as expected, i end up paying tax at individual rate which i'll have to do without a company anyway. Does it make sense?

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