Companies getting schedular payments can, in certain situations, transfer the tax deducted from these payments directly to the company's shareholder-employees. Companies will be able to do this for the 2018 and later tax years.
Transferring tax credits will:
- help the shareholder-employee meet their tax obligations on income they get from working for the company
- reduce the risk of the company's shareholder-employees having to pay use-of-money interest on income which already had tax deducted when paid to the company.
Directly transferring tax deductions
If a company has received schedular payments that have already been taxed, it can transfer those deductions to the shareholder-employees if:
- the company is a close company or has 25 or fewer shareholders
- an amount of income has been paid to the shareholder-employees of the company, either as a shareholder-employee salary without tax deducted or under the personal services attribution rule.
Interpretation statement 18/03 - July 2018
Limit of tax you can directly transfer
The maximum amount you can transfer is the total tax deducted from schedular payments the company received for the year.
You will not be able to transfer tax deductions if it will leave some remaining tax to be paid by the company for the same tax year. You may only transfer up to the amount that is refundable or transferable to another tax type or person.
Limit of tax you can directly transfer
A company has income of $100,000 from schedular payments and $10,000 from interest.
Tax was deducted from schedular payments made to the company of $28,000. No resident withholding tax (RWT) was withheld from the $10,000 of interest paid to the company.
The company allocates a shareholder-employee salary of $100,000 to the company's shareholder-employee, leaving the company with an income tax liability of $2,800 for the year. That is, 28% of $10,000 of interest.
The maximum amount of the tax which can be transferred from the company to the shareholder-employee is $25,200. That is, $28,000 minus $2,800.
Look-through companies do not use this method
A Look-Through Company (LTC) cannot transfer deducted tax using this method. Schedular payments and tax credits received by an LTC are attributed to the owners of the LTC in proportion to the owner's effective look-through interest, so an LTC will not need to transfer tax using the method described on this page.
A close company
A close company is a company where 5 or fewer ultimate natural person shareholders hold either 50% of the total voting interests of 50% of the total market interests, that is, if a market value circumstance exists.
Special rules apply to treat certain associated persons as one person. You'll need to be sure of the criteria by reading the guide, Associated persons definitions for income tax purposes - IR620.
