The financial structure determines ACC payments

Freddy works very little on the farm these days, thanks to the hiring of a 50/50 share milkman, so why is he still giving some of his earnings back to VAC?

It all comes down to structure. Freddy’s dairy farm operates like a business from which he receives a shareholder salary – on which the business pays ACC tax even though his physical involvement in the day-to-day operation of the farm is more or less zero.

Yet, if he was a sole proprietor or in a partnership that ran the farm and enjoyed not being physically involved, Freddy could avoid these ACC levies – by simply treating his freelance income as “passive” and making it. putting in the tax return. as “other income”.

However, if Freddy wanted to continue tinkering on the farm, he would remain responsible for ACC withdrawals – although lower coverage premiums could be negotiated by switching to Cover Plus Extra on the grounds that there would be no loss of income and that the sharecropper would run the farm just as easily without Freddy’s vital contribution (at least Freddy thinks so).

But, since Freddy receives a dairy company shareholder salary, things are a bit more complex. There are a number of options for a farming business to earn income income without dividends or interest through a shareholder-employee.

For the 2013/14 income year, the after-tax ACC tax cost on an income stream of $ 40,000 varies between $ 708 and $ 1,365, depending on the option chosen.

Pay Freddy a gross salary of $ 40,000 deducted by CAFE. He will have the ACC Income Bonus of $ 680 deducted from his PAYE, or 1.7 percent of his salary. The company is required to pay workplace coverage levies totaling $ 1,398 GST included. The business can claim GST and the net balance will be tax deductible.

The cost of the after-tax ACC (at 28%), including the income bonus, is therefore $ 1365.

Pay a shareholder salary of $ 40,000 at the end of the year and ACC retrieves the information through the company’s income tax return, billing the company $ 2,078 including GST. The business can claim the GST and the net balance will again be tax deductible for the business. The cost of the after-tax ACC (at 28%) is then $ 1,300.

Although Freddy, as an employee shareholder, is not a self-employed person, there is a concession under which ACC will consider him to be self-employed so that he can take ACC CoverPlus Extra. This allows Freddy to trade his hedging level down.

Assuming his salary remains constant around $ 40,000 per year, coverage could be arranged at the minimum ACC level ($ 22,464 for the year 2013/14).

The levy includes GST but cannot be claimed by the company as it is billed to Freddy on his own behalf.

Freddy can, however, claim an income tax deduction. Assuming this is Freddy’s only income, the after-tax cost of CoverPlus Extra on $ 22,464 is $ 1,132. And the business will be billed a residual levy of $ 215, including GST, which can be claimed for GST and will be tax deductible. The total cost of the after-tax ACC is then $ 1,267.

There is a fourth option which is to look at the tasks Freddy performed. As a shareholder-employee of CoverPlus Extra, Freddy may be charged at a different rate than other people who work on the farm.

Depending on what Freddy is actually doing, it may be appropriate for him to be taken from ‘titular investor farms and farms’ rather than ‘dairy farming’ which would provide a much higher take rate. low.

In this case, the GST included levies billed to Freddy on the ACC minimum would be $ 730. The business would be billed for residual withdrawals of $ 170 including GST. The cost of the after-tax ACC would be $ 708.

While this is all based on Freddy and his dairy farm, it could just as easily apply to any of his companions involved in raising sheep and oxen.

He is fortunate, however, that Pebbles is an adult and out of Freddy’s hands – if he opts for the third option and cuts his ACC coverage, he also cuts the level of accidental death benefits his family would be entitled to from the. ACC.

That’s no problem for Freddy – but for his fellow young families, it could have a bigger impact.

– This column was written by Leisa Kelsen, Chartered Accountant and ACC Advisor of BDO Taranaki.

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Marianne R. Winn

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