Shareholder Salaries for your LTC

The way it used to work

One way investors have maximised their tax refunds in the past is by paying their spouse a shareholder salary from their loss-attributing qualifying company (LAQC) for the management of the rental properties.

If the spouse did not work elsewhere and only owned 1 shares in the LAQC, then they would pay tax on that income at the lower personal tax rate (10.5% for 2014 tax year).  The shareholder salary paid to the spouse would increase the tax loss on that LAQC which would in turn increase the personal tax refund of the other spouse who generally held 99% of the shares and was on the highest personal tax rate (33% for 2014 tax year).

As an example, lets say a non-working spouse was paid $2,000 for managing one rental property owned by the LAQC.  The spouse would pay tax on that salary of $210 ($2,000 x 10.5%).  This would mean that the other spouse would get an increased loss of $1,980 ($2,000 x 99%) which would increase their tax refund by $653 ($1,980 x 33%).  So, this couple would have increased their tax refund by $443 overall.

The new rules

From the 2012 tax year, look-through companies (LTC) replaced the LAQC.  Under the LTC rules, a LTC is not permitted to pay a shareholders salary.  

So, if a LTC wants to pay a salary to a shareholder, then it must be done on a regular basis with PAYE deducted from the payments.

In addition, the working owner must be employed under a written contract that specifies the terms and conditions of the services to be performed and specifies the amount payable for those services.  However, the definition of a working owner excludes an LTC that mainly invests in property so this effectively means an LTC with rental properties cannot pay a shareholders salary or a PAYE salary to a shareholder.

However, if you want to be able to pay a salary to your spouse for your business (excluding rental property management), then you need to prepare a written contract for the shareholders and pay a regular salary with PAYE deducted.  

To register as an employee to be able to deduct PAYE, you can do this online here.  If you would like a written employment contract, then I can email you an example contract that you can edit to suit your requirements.

Disclaimer: The above article is general in nature and we recommend you seek professional advice tailored to your specific personal situation.