Using Tax Paid to Leverage Other Taxes
January 2011
Tax liabilities are interesting obligations and can create opportunities, within the IRD rules, to satisfy or lessen a tax burden elsewhere. Not quite the old double dip, but in the same vein.
For those tax payers who generate their incomes in a company structure, tax will be paid by that company. That tax creates an imputation credit account. Dividends are declared to shareholders, often those shareholders are family Trusts, that have discretion to distribute their wealth to beneficiaries.
When income is distributed to these beneficiaries, a tax liability is created by that beneficiary on what is substantially the same income the company has already paid tax on. That tax liability is reduced by the imputation credits, which attaches to the company dividend, and a further amount of resident withholding tax (RWT), and now track through to the trust beneficiaries.
However, often the trust beneficiary will have a different taxing obligation to the company, therein lies the advantage and ability to leverage against tax already paid by the company.
Dependent trust beneficiaries (16 years old), with minimal income from their own efforts, pay tax on income of up to $48,000 at less than the company tax rate. Here there are opportunities to lower overall tax rates. Often these dependent beneficiaries receive trust cash to sustain their lifestyle, from “family resources” so the distribution of income is a logical follow on effect.
For dependent trust beneficiaries who have student loans, the opportunity is to use the tax differential to convert withholding taxes into refunds to repay this debt entirely. For others, an opportunity to reduce overall taxation, especially if the company balance sheet is structured for efficient use of debt, and “laziness” is removed. See article Avoiding a Lazy Balance Sheet.
Company tax credits not used this year, convert to a loss to be offset against future income. Withholding taxes such as PAYE or RWT are refunded immediately to the extent it is covered with excess imputation credits.
Trust income received from a well constructed company balance sheet will comprise not only dividends but interest on shareholder loans, making additional RWT available to leverage in the beneficiaries tax return.
To find out more contact Robert Willis at CST Nexia Ltd.
DDI: 09 261 1651 Mobile:021 274 7350 Email: rwillis@cstnexia.co.nz
Important: Items contained in this newsletter are general comments only and do not constitute advice. Changes in legislation may occur quickly and clients are recommended to seek our formal advice before acting in any of the areas.
