How Can New Zealand Business Owners Take Money Out of Your Companies?
After a year of hard work, your company’s account might have accumulated some surplus funds. So, how can shareholders legally and efficiently withdraw money from the company while maximizing tax benefits?
In this article, we’ll share 4 common methods for withdrawing funds, along with the pros and cons of each.
1. Shareholder Dividend
When a company pays taxes, it generates imputation credits. For every dollar of tax paid, the company receives an equivalent imputation credit. These credits can be attached to dividends to prevent double taxation for shareholders.
However, there are challenges:
- Regardless of the shareholder’s personal tax rate, the company must pay an additional 5% RWT (Resident Withholding Tax) when dividends are distributed.
- If a shareholder’s personal tax rate is lower than 28%, unused imputation credits cannot be refunded but can carry forward to the next year.
- If the shareholder relies solely on dividends as income, they might never fully utilize the accumulated tax credits, potentially resulting in overpayment of taxes.
Example:
| Company Financials | Amount (NZD) |
|---|---|
| Pre-tax profit | $10,000 |
| Less 28% company tax | $2,800 |
| Post-tax profit (available for distribution) | $7,200 |
The company needs to ensure sufficient RWT is paid to make the total credits (imputation + RWT) equal 33% of the dividend. Here’s how it works:
| Dividend Details | Amount (NZD) |
|---|---|
| Net dividend paid to shareholder | $6,700 |
| Add RWT (5% of net dividend) | $500 |
| Add imputation credits | $2,800 |
| Total dividend | $10,000 |
For a shareholder with a 33% personal tax rate, the dividend would appear as follows in their tax return:
| Shareholder Tax Calculation | Amount (NZD) |
|---|---|
| Dividend received | $10,000 |
| Less personal income tax (33%) | $3,300 |
| Less imputation credits | $2,800 |
| Less RWT | $500 |
| Remaining tax payable | $0 |
2. Pay Yourself a Salary (with PAYE)
Business owners can pay themselves a regular salary like any employee, with PAYE deducted.
Pros:
- This method might benefit immigration applications, loans, or government support programs as it shows stable, regular income.
Cons:
- Overestimating profits and paying too much salary could lead to unnecessary tax payments, especially if the company incurs a loss.
- Taxes are paid earlier, leaving less flexibility for cash flow adjustments.
3. Shareholder Salary
Shareholders can withdraw funds irregularly as drawings throughout the year. At the end of the tax year, the company determines its profit and allocates it as shareholder salary.
Advantages:
- This method provides more flexibility in tax planning, allowing shareholders to maximize tax benefits.
Caution:
If a shareholder withdraws more than the company’s final profit allocation, the shareholder current account becomes overdrawn. This is treated as a loan from the company, requiring:
- Interest charges to the shareholder or payment of FBT (Fringe Benefit Tax) to the IRD.
- Tax on any interest earned by the company.
4. Reimburse Shareholder Investments
Withdrawing funds that the shareholder originally invested in the company is tax-free.
However, it’s crucial to monitor the shareholder current account. This account tracks transactions between the company and its shareholders. While funds can flow in both directions, overdrawn accounts—where withdrawals exceed investments—can trigger tax complications.
Advice from Us
Each business and family’s situation is unique. To determine the best approach for your specific needs, consult a professional tax accountant who can design a tailored plan to maximize your benefits.
If you have any questions about this topic, feel free to contact us! We’re here to help.
