Insight | New Zealand Tax Focus – Review of Closely Held Companies and Look Through Companies

The IRD has also released a discussion document in September 2015 on the taxation of look through companies and closely held companies. Broadly the proposals include recommendations that:

1. There are some minor amendments to the count test for look through companies and trust shareholders to remove some loop holes.
2. It should be possible to have more than 1 class of share for look through companies provided they all carry the same voting rights.
3. Look through companies cannot be used by non-residents to derive foreign income. We have a problem with this as New Zealand has a foreign trust regime which encourages this as well as the limited partnership regime which can be used for the same purpose. We cannot see why from a policy perspective they are suddenly seeking to prevent look through companies being used for these reasons.
4. The IRD has confirmed that it intends to continue to allow residents to derive foreign sourced income through look through companies without limitations. We use these extensively for structuring purposes for holding both active and passive investments in foreign countries.
5. The loss limitation rule will be removed for look through companies unless they are in a partnership of LTCs.
6. There should be no remission income for a shareholder when an amount owed to them by an LTC is subsequently remitted because the LTC cannot repay the loan. While this may seem logical, the tax community has been turning itself inside out trying to work out whether the shareholder is actually that same person or some sort of alter ego.
7. When a company enters into the LTC regime, there is a deemed wind up with shareholders taxed at their marginal rate rather than the existing 28% company rate. This has provided an ongoing opportunity to avoid 5% tax on entry into the LTC regime with many advisors using it as an alternative to liquidation.
8. There is proposed to be some liberalisation of the restrictions around tainted capital gains whereby closely held companies enter into transactions with associated non-corporates, eg trusts. These gains should be able to be distributed tax free on winding up and not simply in situations where the gain is derived in the course of a winding up as is currently the case.

Family Business ~ Insight | We’ve grown! Let us introduce Covisory Trust Services

Covisory Trust brings together two New Zealand trust experts Nigel Smith and Marcus Diprose. Collectively they have a wealth of experience providing independent trust advice and trustee services both domestically and offshore. Covisory Trust offers Independent Trustee Services, Trust Formation, Insurance Trust Services, Formation of NZ Limited Partnerships and Look Through Companies and Independent Trust Advice.

In our opinion current case law and proposed changes to New Zealand Trust law will put increasing pressure on trustee’s to do their job correctly and conversely be exposed to more risk. The Covisory team specialise in this area and we are well equipped to deal with your specific needs.

Our services will include:
  1. Independent Trustee Services

a. We will provide independent trustees services to a wide range of New Zealand domestic and foreign trusts.

(i) Full administration services to ensure the decisions of the trustees, and other parties to the trust, are:

* Properly documented;

* Record keeping is up-to-date;

* Accurate and timely reporting is maintained and communicated to all parties to the trust.

b. Act as a Court Appointed Trustee.

c. Have an independent Trustee Company for New Zealand Domestic Trusts (Covisory Trust Limited) and for New Zealand Foreign Trusts (Covisory (NZ) Trust Limited) which can act as a trustee of a Trust.

2.  Trust Formation

a. We provide full formation services for New Zealand trusts. Includes:

(i) Initial client meetings;

(ii) Drafting of all trust documentation based on the instruction of the client;

3.  Insurance Trust Services

Private businesses should always have some form of insurance coverage to help facilitate the sale and purchase of shares upon the death or permanent disability of a director/shareholder.

(i) We work with insurance brokers to set up buy/sell agreements and provide trustee services to deploy the insurance proceeds as per the provisions of the trust deed.

  1. Formation of New Zealand Limited Partnerships (NZLP) and Look Through Companies (LTC)

a. We provide full formation and administration services for both NZLP and LTCs including acting as a New Zealand resident General Partner or Director.

5.  Independent Advice

a. Full Review of Trust Structures due to changes to family dynamics or law changes.

(i) Including advice and recommendations on what steps to take on a go forward basis.

Recent projects the CTSL team have been involved in include:
  • Advice and formation of a New Zealand foreign trust structure to hold intellectual property;
  • Family restructuring; including the consolidation of a number of existing trusts, resettlement of assets, additions of beneficiaries and associated advice;
  • Advice to a New Zealand private charitable trust as to how distributions can be made under the terms of the trust and development of a checklist for the trustees to assist in vetting applications received for distributions.


If you would like to find out more about Covisory Trust Services please visit us at or talk to Nigel Smith today on +64 9 307 1777 ( or Marcus Diprose on +64 9 307 1777 ( ).

Deduction of Shareholder Employee’s Salary of an LTC

Recently we have been asked whether a shareholder employee’s salary is deductible for a LTC (Look Through Company) and whether it can be paid without having to deduct PAYE.

There are two parts to the question one being the deductibility of the shareholder employee’s salary and another being the PAYE withholding.

    • The LTC is allowed a deduction for the shareholder salary, insofar as the shareholder is a working owner employed by a LTC.
    • There must be an employment contract pursuant to which salary is paid for services performed by the working owner.
    • The employment contract must specify the amount of salary to be paid and terms and services to be performed by the working owner.
    • The available deduction is limited to the salary payments authorised by the contract of employment. A bonus is also deductible even if not specifically provided for in the employment contract.
    • The working owner status is not achieved if the LTC is wholly or mainly engaged in investing, holding or dealing in shares, securities or land.  The LTC must derive an active as opposed to passive income.
    • The working owner providing services to the LTC is therefore classified as an employee.
  • PAYE
    • PAYE has to be deducted from the salary paid to the working owner.
    • The definition of a PAYE income payment includes salary, wages, extra pay, etc (this would cover bonuses as well)
    • The term salary and wages specifically includes payments to the working owner of a LTC

In Summary:

  • The LTC is allowed a deduction for salaries, wages and bonuses paid to the working owner pursuant to the employment contract.
  • PAYE must be deducted.


NZ Foreign Trust and Look Through Company Regimes

New Zealand is a common law country that has a long standing and mature trust and foreign trust industry.

Trusts are extensively used for asset protection, tax planning and trading purposes. New Zealand Trust legislation, the Trustees Act 1956, is modelled on the United Kingdom Trust Legislation, the Trustees Act 1925, with some departures. It is possible to use a corporate trustee as the trustee of the Trust which offers greater flexibility and separates control further from the settlor.

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