The New Zealand company tax rate was reduced from 33 to 30 percent from the beginning of the 2008/2009 income year – usually 1 April 2008 for companies with a standard 31 March balance date.
This applies to companies and other entities defined as companies by the Income Tax Act, including incorporated societies and unit trusts.
You’ll probably already know that company tax is the tax paid on the annual profit earned by a company. The reduction to the company tax rate means most New Zealand companies will pay less tax on the profit they generate next year.
If you currently operate as a sole trader, it’s possible that you may pay more tax than if you operated as a company.
There are many reasons to operate a New Zealand business under a Limited Liability company, rather than as a sole trader. I have summarised the key benefits below for you.
Limited Liability
The main advantage of operating as a limited liability company is that risk is redirected from you as an individual to the company (as opposed to you as an individual when you are a sole trader). A limited liability company is a legal entity in its own right and can hold property in its own name, can sue (and be sued) and usually has an indefinite “life”.
Shareholders liability for the company’s debts is limited to the amount of the paid capital they introduced to the company. If a shareholder holds 100 $1 shares, that shareholder’s liability for the company’s debts is limited to $100. In a sole trader environment, the liability for debts incurred is unlimited, which could mean losing the family home and other possessions.
Registration & Protection of Name/Brand
When your company is formed, no other business or company in New Zealand should be able to reserve a name that is identical or very similar to your own name. A sole trader has no protection in this sense if they are conducting business under a certain name/brand. That name can be registered by another entity in New Zealand and there is little to no recourse for the sole trader in question.
Taxation & employing family members
A company provides significant tax benefits. Individuals pay income tax at the rate of 19.5% on income up to 38,000; 33% on income between $38,000 but below 60,000; and 39% on all income above $60,000. As previously advised, the company tax rate will be 30% as from 1 April 2008.
By introducing family members as employees and/or shareholders income splitting is possible to enable less tax to be paid at the higher rates. In some cases after individuals reach 60,000 of income, any additional company profits may be able to be taxed at 30% and retained as tax paid profits, thus reduce the total tax otherwise payable.
Approval from the Inland Revenue Department is required BEFORE you can pay wages to a spouse or family member of a sole trader. Restrictions are placed on the hourly rate which can be paid but with a company there is no such restriction. The amount of remuneration paid must be market rates.
Continuity
If a shareholder wishes to sell part or all of his or her shares the company continuity is not affected with a new shareholder. This would be different with a sole trader as the business has to be sold..
If you feel that a limited liability company structure may be right for you, please do not hesitate to contact us on 0800 836 836 to help you form one.
Alternatively, if you would like to form the company yourself, you can do this at www.companiesoffice.govt.nz