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 (released 29 March 2021). 

Both of these documents 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. 

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