Rules around claiming tax deductions for family members

Pharmacies, like the majority of other New Zealand businesses, are traditionally family owned ‘mum and dad’ businesses. Often various family members are involved in the business and these family members are entitled to be paid for the services they provide. It is important to remember the requirements for claiming tax deductions for payments to these family members.

Generally, remuneration such as salary and wages incurred in deriving taxable income is deductible expenditure. However, there are additional requirements when those payments are made to a family member.

To claim a tax deduction for an amount paid to a family member, that family member must actually provide services to the business and the business must be able to show evidence of this if required. Some common forms of collecting the appropriate records are:

  • A wage book or diary recording dates, hours worked, and services performed

  • A vehicle log book recording the dates and nature of the business travel

  • An employment contract

  • PAYE payment information

  • Invoices if the family member is an independent contractor

  • Bank statements showing the payments made

The amounts paid must also not be deemed to be excessive for the services that the family member has provided. If the IRD deems the amounts paid to family members to be excessive, they may reallocate the income of the business based on what is considered reasonable and in the case of a company, treat the excess as a dividend derived by the family member.

The IRD consider payments to family members for services to be excessive when the amount paid is more than a reasonable amount for the services provided or in other words, the remuneration is not calculated on an independent “arm’s length” basis.

The purpose of these provisions is to prevent taxpayers from reducing their income tax liability by allocating excessive payments to relatives and others, and to prevent the streaming of excessive losses to relatives to reduce their income tax liabilities.

If you employ family members in your business, then we recommend you discuss their remuneration with your business advisor.