At Accountech, we're committed to unraveling the complexities of accounting for our clients, and today, we bring your attention to a crucial aspect that could impact sole traders in New Zealand – employing family members. It's a scenario we've encountered recently, where some sole traders were unknowingly employing and compensating their spouses or partners without the necessary approvals.
In New Zealand, the rules are clear: while registered companies can freely employ family members, sole traders must seek approval from the Inland Revenue if they wish to bring their spouse or partner into the business. The process may seem daunting, but understanding the guidelines outlined in QB 19/01 can make the journey smoother.
Guidelines for Employing Family Members
According to IRD guidelines, claiming tax deductions for payments to family members involves specific requirements:
No Income Splitting: You cannot split your income between family members for tax purposes. Payments must be genuine compensation for services rendered.
Reasonable Payments: To claim a tax deduction for payments to a family member, the amount paid must not be excessive. It should align with the fair market value for the services provided.
Comparable Rates: If the family member is a spouse or partner, you must not pay them more than what you would pay a non-family member for equivalent services.
Commissioner's Approval: Crucially, if your family member is your spouse or partner, obtaining the Commissioner’s prior approval is necessary unless your business is structured as a company.
The Definition of Family Members
Family members include:
Your spouse or partner
Parents, children, sisters, brothers, grandchildren, and grandparents, along with their spouses and partners
Spouse or partner’s parents, sisters, brothers, grandchildren, and grandparents
Adoptive parents, adopted siblings, children, and grandchildren of you and your spouse or partner
The trustee of a trust that any of these individuals can benefit under
In conclusion, while navigating the intricacies of employing family members as a sole trader may seem challenging, it's a necessary step to ensure both legal compliance and a harmonious business environment. If you're a sole trader considering this avenue, reach out to us for expert guidance tailored to your unique situation.
Accounting Disclaimer: This blog post is for informational purposes only and does not constitute professional advice. Consult with a qualified accountant or tax advisor for personalised guidance based on your specific circumstances.