How does my profit attract ACC?

Question from Daniel updated on 1st February 2011:

I have set up a LAQC and had five investment residential houses included. 2 years ago I sold four and have only one that is now making a 'profit'. I am a director and 50% shareholder, my wife being the other shareholder and director. While I understand I have to pay tax on the profit, I am being asked to pay ACC on the profit? I don't understand this as I thought all residential rental income was passive and ACC was not involved? If it can be attribituted, is there anyway to 'minimise' this apart from lowering the profit?

Our expert Mark Withers responded:

It sounds to me like your accountant is allocating the profit to you as salary from the company. The allocation of salary does attract ACC. It's also possible that the salary is attracting tax at a higher rate than the company if you and your wife are higher income earners.

Your alternative is to retain the profit in the company and pay the company tax rate of 30%. If you then decide to draw the surplus cash from the company you will need to make a dividend declaration. The dividend will have the 30% credit for the tax paid attached to it in the form of an imputation credit. The dividend income is not then going to attract ACC. 

Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.


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