Snippets May 2021

Fair market salary reminder

There is a general need for a business to pay associated employees a fair market salary for their personal service. Given the implementation of a 39% personal marginal income tax rate on income over $180,000 from 1 April 2021, Inland Revenue’s scrutiny of such salaries is expected to increase. This has been confirmed through Inland Revenue issuing two related documents in March 2021 in quick succession, namely:

  • Interpretation Statement 21/02 – Income tax – Calculating income from personal services to be attributed to the working person (released 19 March 2021); and

  • Revenue Alert 21/01 – Diverting personal services income by structuring revenue earning activities through a related entity such as a trading trust or a company: the circumstances when Inland Revenue will consider this arrangement is tax avoidance (released 29 March 2021).

Both of which are aimed at warning taxpayers against the use of associated entities or family members, to avoid the highest personal income tax rate on income from the supply of services that they personally perform.  For example, surgeons or consultants operating through a company.

We have seen instances where the same flat salary amount is allocated annually to working shareholders for numerous years, without an annual review of that salary nor a comparison to market. Hence, it is a timely reminder to review salaries paid to associated employees, to ensure they reflect current market conditions.

As with any tax position, best practice would be to document the rationale for the allocated salary (e.g. market data or a file note), to evidence reasonable consideration and care has been taken.

Supply shortages

COVID-19 has fundamentally disrupted global trade to the point there are a number of product shortages starting to play out, and in some cases of some surprising items:

  • The shipping containers themselves: With only two makers of shipping containers globally and containers being trapped in the congestion at ports, there is now a shortage of containers, let alone the products that fill them.

  • Toilet paper: At this stage, most people are aware of the high demand for toilet paper – with countless people stockpiling and panic-buying rolls to ensure that they don’t run out during a lockdown. However, the risk now exists that manufacturers will run low on wood pulp due to the container shortage.

  • Marmite: The popular but polarizing spread has also been in short-supply due to a lack of brewer’s yeast amidst pub closures.

  • Ketchup packets: The US is facing a shortage of ketchup packets because of the increased demand due to the change from dine-in to takeaway and delivery.

  • Garden Gnomes: Left with few leisurely options available in lockdown, people have resorted to gardening as a source of entertainment. This boom in demand, coupled with a shortage of raw materials due to the Suez Canal incident, has seen the humble garden gnome become a hot commodity.