A tax bill passed in May made changes that affect cashflow.
Companies get more choice with RWT
From 2017-18, companies can choose to not deduct resident withholding tax on a fully imputed dividend paid to a corporate shareholder. A fully imputed dividend has a tax credit passed on because the company’s already paid tax.
A third tax option for some shareholder-employees
Shareholder-employees of close companies (with five or fewer participants) who receive regular salary or wages, and variable amounts of other employment income, now have a third option as to how they pay tax.
They can now split their income so the base salary is subject to PAYE and the variable amount is paid out before tax. Previously they had to choose either one or the other.
A shareholder-employee who decides to either apply provisional tax to all their earnings, or use the new split method, is committed to either choice for three years.
It’s complicated – imputation credit anomaly tackled
Companies owned in common, but not wholly owned, can now transfer imputation credits as part of what IRD calls “loss grouping”.
Owned-in-common companies with part-owned loss-making businesses have been able to transfer losses to profit-making companies, benefiting both – except for imputation credits. The more tax paid, the more imputation credits available.
However, when losses were transferred to the profit-making company, the latter’s tax bill shrank, meaning there were fewer imputation credits to be passed on.
The changes allow the “profit” company to pay a fully imputed dividend despite loss grouping, keeping the benefit of the loss transfer.
Not so complicated for LTCs, though
With the loss limitation rule being removed for most Look Through Companies, losses that were previously restricted and carried forward are now freed up from 2017-18 and available for offsetting against income. However, LTCs that carry on through a partnership or joint venture will still be subject to the loss limitation rule.
The loss limitation rule ensures the losses an owner can claim reflect their economic loss in the LTC. The deductions an owner can use are limited to the contribution the owner has made, or is liable for.