Farm companies provide significant flexibility and tax advantages compared to other business structures. However, many farmers struggle with the best way to extract profits efficiently. Understanding the three primary extraction methods—shareholder salaries, dividends, and director fees—can significantly improve your tax position and support family financial needs.
Understanding Your Extraction Options
Farm companies offer three key methods for profit extraction: shareholder salaries, dividends, and director fees. Each carries different tax rules, reporting requirements, and strategic benefits. Strategic combinations of these tools, tailored to your unique situation, can optimize cash flow and tax outcomes while maintaining IRD compliance.
Shareholder Salaries – The Foundation Strategy
Shareholder salaries compensate for actual work performed and must be reasonable per IRD rules. These salaries are subject to PAYE and ACC levies but are often deductible by the company. This strategy ensures steady personal income and supports access to various entitlements and coverages.
Dividend Strategies and Tax Implication
Dividends provide a way to distribute profits tax-efficiently, especially when shareholders are on lower tax rates. With the company tax rate at 28%, dividends to individuals in lower brackets (e.g. 17.5%) can yield tax savings. Use imputation credits to avoid double taxation and strategically time dividends to manage personal income levels across years.
Director Fees for Strategic Extraction
Director fees offer a separate income stream for governance contributions distinct from operational duties. These can be useful for compensating family members not involved in day-to-day operations but who contribute to strategy. They have different ACC and tax implications compared to salaries and should be planned accordingly.
Annual Tax Rate Management
Strategic extraction involves careful monitoring of personal marginal tax rates. Keeping income within lower brackets can reduce overall tax paid. Coordinate extraction amounts with other income such as investment returns or off-farm work to balance your tax position.
Family Income Distribution Strategies
Engaging family members in legitimate roles allows income splitting via salaries, dividends, or fees. This approach can reduce the household’s total tax burden while providing fair compensation. Plan around attribution rules, student loans, and benefit entitlements to ensure compliance and maximize effectiveness.
Timing and Cash Flow Optimisation
Seasonal cash flows mean timing matters. Extract profits when it aligns with both business liquidity and tax opportunities. Coordinate with provisional tax cycles and plan year-end moves to maximize deductions and avoid surprises.
Professional Guidance Requirements
Optimizing extraction requires coordinated tax, accounting, and business strategy advice. Agricultural accountants understand these nuances and can tailor strategies to your farm’s structure and family dynamics. Regular reviews ensure strategies evolve with your farm and the tax landscape.
Compliance and Documentation
To remain compliant with IRD, document all extraction-related decisions thoroughly. Clearly justify salaries and fees, follow company policies for dividends, and ensure consistency with business activities. Routine audits of your approach help preempt compliance issues and strengthen your tax position.
Optimizing profit extraction from your farm company is key to maximizing your family’s income and minimizing tax. At CMK Chartered Accountants, we specialize in tailored extraction strategies that work for Taranaki farmers. Contact us today to review your current approach and discover better ways to get value from your business structure.