Nav­i­gat­ing com­plex ACC levies

Matamata Chronicle - - Rural Delivery - By LEISA KELSEN

Freddy does very lit­tle work on the farm th­ese days, thanks to tak­ing on a 50/50 sharemilker po­si­tion, so why is he still hand­ing over a chunk of his earn­ings to ACC?

It all comes down to struc­ture.

Freddy’s dairy farm op­er­ates as a com­pany from which he re­ceives a share­holder salary. The com­pany pays an ACC levy on his salary even though his phys­i­cal in­volve­ment in the daily op­er­a­tion of the farm is more or less nil.

Yet, if he was a sole trader or in a part­ner­ship that was run­ning the farm and en­joy­ing not be­ing in­volved phys­i­cally, Freddy could avoid th­ese ACC levies by sim­ply treat­ing his self-em­ployed in­come as ‘pas­sive’ and putting it in the tax re­turn as ‘other in­come’.

How­ever, if Freddy wanted to con­tinue odd­job­bing on the farm, he’d re­main li­able for ACC levies, al­though lower cover pre­mi­ums could be ne­go­ti­ated by mov­ing to Cover Plus Ex­tra on the grounds there would be no loss of in­come and the sharemilker would run the farm just as eas­ily with­out Freddy’s vi­tal con­tri­bu­tion, (or so Freddy thinks).

But, be­cause Freddy re­ceives a share­holder salary from the dairy farm com­pany, things are a lit­tle more com­plex.

There are a num­ber of op­tions for a farm­ing com­pany to get a non­div­i­dend, non-in­ter­est in­come stream through to a share­holder-em­ployee.

For the 2013/14 in­come year, the af­ter-tax ACC levy cost on a $40,000 in­come stream varies be­tween $708 and $1365, de­pend­ing on the op­tion cho­sen.

Pay Freddy a PAYEd­e­ducted salary of $40,000 gross. He’ll have the ACC earner pre­mium of $680 de­ducted with his PAYE, be­ing 1.7 per cent of his salary.

The com­pany is re­quired to pay Work­place Cover levies to­talling $1398, GST inclusive. The com­pany can claim GST, and the net bal­ance will be in­come tax de­ductible.

The af­ter-tax (at 28 per cent) ACC cost in­clud­ing the earner pre­mium is thus $1365.

Pay a share­holder salary of $40,000 at the end of the year and ACC picks up the in­for­ma­tion through the com­pany’s tax re­turn, in­voic­ing the com­pany for $2078 in­clud­ing GST.

The com­pany can claim GST and the net bal­ance will again be in­come tax de­ductible to the com­pany. The af­ter-tax (at 28 per cent) ACC cost is then $1300.

Al­though Freddy, as a share­holder em­ployee, is not self-em­ployed, there is a con­ces­sion un­der which ACC will deem him to be self-em­ployed so he can take ACC CoverPlus Ex­tra. This lets Freddy ne­go­ti­ate his cover level down­wards.

As­sum­ing his salary stays con­sis­tent around $40,000 per an­num, cover could be ar­ranged at the ACC min­i­mum level ($22,464 for the 2013/14 year).

The levy in­cludes GST but can’t be claimed by the com­pany as it is in­voiced to Freddy in his own name.

Freddy can claim an in­come tax de­duc­tion though. As­sum­ing this is Freddy’s only in­come, the af­ter-tax cost of CoverPlus Ex­tra on $22,464 is $1132.

And the com­pany will be in­voiced for resid­ual levies of $215 in­clud­ing GST, which will be able to be claimed for GST and will be in­come tax de­ductible.

The to­tal af­ter-tax ACC cost is then $1267.

There is a fourth op­tion that in­volves look­ing at the du­ties Freddy per­forms. As a share­holder-em­ployee on CoverPlus Ex­tra, Freddy can be levied at a dif­fer­ent rate to the other peo­ple who work on the farm.

De­pend­ing on what Freddy ac­tu­ally does, it may be ap­pro­pri­ate for him to be levied un­der ‘‘holder in­vestor farms and live­stock’’ rather than ‘‘dairy farm­ing’’, which would of­fer a much lower levy rate.

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

While this is all based on Freddy and his dairy farm, it could just as eas­ily be ap­plied to any of his mates in sheep and beef farm­ing.

It is lucky that Peb­bles is grown up and off Freddy’s hands though, be­cause if he goes for the third op­tion and di­als down his ACC cover he also re­duces the level of ac­ci­den­tal death ben­e­fits his fam­ily would be en­ti­tled to from ACC.

Not such an is­sue for Freddy, but for his mates with young fam­i­lies it could have a big­ger im­pact.

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