sharetrader
Page 1 of 3 123 LastLast
Results 1 to 10 of 29
  1. #1
    Member
    Join Date
    Oct 2013
    Posts
    77

    Default Trading through a 'Company' structure - Tax obligation

    Hi all,

    As I understand it, if you trade through a company structure, your profit is taxed at a flat rate of 28%.

    Now once you draw money from the company into your own account, do you have to pay a further income tax per your marginal rate on these withdrawals?

    If you do, then I guess it would make more sense to trade as a sole trader.

    Any thoughts?

  2. #2
    Guru
    Join Date
    Apr 2003
    Location
    Wellington, New Zealand
    Posts
    4,876

    Default

    Quote Originally Posted by hummerh40 View Post
    Hi all,

    As I understand it, if you trade through a company structure, your profit is taxed at a flat rate of 28%.

    Now once you draw money from the company into your own account, do you have to pay a further income tax per your marginal rate on these withdrawals?

    If you do, then I guess it would make more sense to trade as a sole trader.

    Any thoughts?
    I would go and talk to an accountant...

    What do you mean by "draw money into your own account"?? Either that would be a wage/salary (with PAYE deducted) loan or a dividend (imputed) or fraud (theft from the company) I guess....

  3. #3
    Member
    Join Date
    Oct 2013
    Posts
    77

    Default

    Thanks for the reply blackcap. I just meant if you transferred the profits you have made through the company into your personal account (as a salary), would you then have to pay personal income tax on that?

    For a single person run company, you would:
    -have to pay 28% income tax through company
    -would have to pay yourself in the form of wage or salary and thus would be required to pay a further personal income tax of say 33%

    have I got it right? sorry for the confusion

  4. #4
    Guru
    Join Date
    Apr 2003
    Location
    Wellington, New Zealand
    Posts
    4,876

    Default

    Quote Originally Posted by hummerh40 View Post
    Thanks for the reply blackcap. I just meant if you transferred the profits you have made through the company into your personal account (as a salary), would you then have to pay personal income tax on that?

    For a single person run company, you would:
    -have to pay 28% income tax through company
    -would have to pay yourself in the form of wage or salary and thus would be required to pay a further personal income tax of say 33%

    have I got it right? sorry for the confusion
    You would probably transfer those profits as a dividend which would then be fully imputed and passed onto the shareholder being you.
    So you do not end up paying tax twice. The only thing extra you may end up paying is the difference between the 33% marginal tax rate and the company tax rate of 28%. Hope that helps.

  5. #5
    Guru
    Join Date
    Feb 2005
    Location
    Auckland, , New Zealand.
    Posts
    3,227

    Default

    Well your salary in that case would become a deductible expense for the company.

    KISS is the best way to go.

  6. #6
    Member
    Join Date
    Apr 2014
    Location
    Christchurch
    Posts
    103

    Default

    Basically yes. Once you wish to draw funds out of the company you will need to pay either a shareholder salary or a dividend and thus the income will be taxed at your personal marginal rate.

  7. #7
    Member
    Join Date
    Jun 2016
    Posts
    87

    Default

    You won't be paying tax twice. You either pay it through the company as profit or as wages.

    For example: say you have $100,000 profit and you take $40k out for you, it would be classed as drawings and you would pay company tax on $100,000.

    But if you have $100,000 profit and you take out $40,000 as a wage and pay paye as you go, then you only pay company tax on $60,000.

  8. #8
    Guru
    Join Date
    Feb 2005
    Location
    Auckland, , New Zealand.
    Posts
    3,227

    Default

    Inhuman is correct. Pipi is in error in his example. Salary can either be paid out direct or credited to your drawings account after personal tax is deducted. Then you can draw out from there. It could also be paid out as a dividend but tax still has to be calculated at your marginal rate. May be higher or lower than 28c/$.
    Last edited by 777; 14-03-2017 at 12:28 PM.

  9. #9
    Member
    Join Date
    May 2014
    Posts
    204

    Default

    Quote Originally Posted by unhuman View Post
    Basically yes. Once you wish to draw funds out of the company you will need to pay either a shareholder salary or a dividend and thus the income will be taxed at your personal marginal rate.
    what if that person is to sell those shares in that company to get the money out? - it may be a private company, but its still a share sale which are not capital gains taxed.

    Also another question. If you set up an entity (company or trust) and that entity buys shares and sells them. It might be a mix of long term holds - which it would sell some of due to circumstance, and then short term opportunistic stuff, then does that entity have to pay capital gains tax?

    I am asking because I know a lot of people would have companies of family trusts which would do a lot of share trading, but in a lot of cases these entities don't pay capital gains tax. It is a gray area with the IRD, so its kind of at what point is it "yes you are actively trading" and need to pay capital gains tax, or "we can see thats not what the entity was primarily set up to do"... all of this of course involves the IRD actually asking these questions of your entity, which usually means they are doing an audit of you, which is pretty rare....

  10. #10
    Member
    Join Date
    Apr 2014
    Location
    Christchurch
    Posts
    103

    Default

    Quote Originally Posted by alistar_mid View Post
    what if that person is to sell those shares in that company to get the money out? - it may be a private company, but its still a share sale which are not capital gains taxed.
    Whether the share sale is taxable or not is a different question and depends on many different factors. But ultimately if there is taxable income in the company, when the shareholder withdraws funds they will need to pay a salary or dividend. The dividend will have IC's attached thus 5% RWT will be payable bringing the ultimate tax rate to 33%, or a salary which will reduce the income in the company, while increasing the tax paid by the shareholder.

    Quote Originally Posted by alistar_mid View Post
    Also another question. If you set up an entity (company or trust) and that entity buys shares and sells them. It might be a mix of long term holds - which it would sell some of due to circumstance, and then short term opportunistic stuff, then does that entity have to pay capital gains tax?

    I am asking because I know a lot of people would have companies of family trusts which would do a lot of share trading, but in a lot of cases these entities don't pay capital gains tax. It is a gray area with the IRD, so its kind of at what point is it "yes you are actively trading" and need to pay capital gains tax, or "we can see thats not what the entity was primarily set up to do"... all of this of course involves the IRD actually asking these questions of your entity, which usually means they are doing an audit of you, which is pretty rare....
    Correct, basically answered your own question. This is generally why it is important to get an accountant or advisor of some sort involved early on so they can set up structures and do the right things that will demonstrate intention if the IRD were to come looking.

    I agree there are probably many small time investors that would have issues between long term holds and short term trading if the IRD where to do a review or audit, leading to income tax risks. To be fair from my experience this is largely through ignorance - the "capital gain" concept for shares is not a black white issue which most people don't understand on a common law basis. There are however a couple of simply steps to minimise risk; i.e. keeping investing and trading in separate entities.

    Audits are rare, but you would want your cards to be in order if you were on the receiving end of one as they can last decades...

    Ultimately it is piece of mind.
    Last edited by unhuman; 24-03-2017 at 03:50 PM.

Bookmarks

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •