Helen Twose 's Opinion

Personal finance and KiwiSaver columnist at the NZ Herald

Kiwisaver: Does shareholder income count?

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Surgeons' case has direct effect on whether shareholder earnings are taken into account for house subsidy.

The Housing New Zealand website provides guidance on the income that will be taken into account for the housing subsidy.
The Housing New Zealand website provides guidance on the income that will be taken into account for the housing subsidy.

My partner and I are looking at purchasing our first home in a couple of years, and hope to use the KiwiSaver First Home Subsidy.
I am a shareholder in a company, and get paid a shareholder salary.
Is any profit retained in the company captured as "income" for the KiwiSaver First Home subsidy?

I ran this past the KiwiSaver team at Housing New Zealand, who are responsible for administering the Welcome Home Loan and KiwiSaver deposit subsidy.

Its response was: "Housing New Zealand cannot consider a company's profits as income for an individual's application for the KiwiSaver first home deposit subsidy.

"The individual and the company are ultimately two separate entities."

KPMG tax partner Murray Sarelius gave me some more detail:

"The Housing New Zealand website provides guidance on the income that will be taken into account for the housing subsidy.

"Essentially this looks at personal income as disclosed to Inland Revenue.

"Normally, this would mean that income of a company would only be taken into account if paid to the shareholder as a dividend or salary.

"However, specific tax rules may change this outcome.

"First, the owner of a business must pay a fair salary for the services they perform, preventing personal income from being artificially reduced - this was the subject of the Penny and Hooper decision that received some publicity around 2011."

This landmark case related to two Christchurch surgeons Ian Penny and Gary Hooper, who used company structures and family trusts to artificially lower their salaries to avoid a higher personal income tax rate introduced in 2001.

The Supreme Court sided with the IRD when it ruled that "income derived from personal exertion should belong in its appropriate taxation band and should not be inappropriately diverted away".

"Secondly, individuals who operate through a company may be required to treat the income of the company as their own for tax purposes, if the company's income is derived substantially from the direct personal skills, experience or labour of an individual," said Sarelius.

"There are several areas where Inland Revenue, and Government, has focused on the need to ensure that social assistance is based on a comprehensive view of a person's income.

"KiwiSaver housing subsidies is likely to be another one of those areas."

Here's a recap on how you can use KiwiSaver funds to buy your first home.

If you've been a KiwiSaver member for at least three years you are able to tap your own contributions, those made by your employer and any investment gains made.

You can't touch the $1000 kick-start and any government-supplied member tax credits.

To access this money for a first home purchase you need to get in touch with your KiwiSaver provider, preferably well in advance of signing the dotted line on a house purchase, and it will arrange to transfer the funds to your solicitor on or before settlement date.

In some circumstances a person who has owned a house before, but no longer owns property and meets fairly strict income and asset ownership criteria can also dip into their KiwiSaver nest egg.

Housing New Zealand is responsible for running the ruler over these applications.

More information is on the Housing New Zealand website: www.hnzc.co.nz.

Lower income individuals or couples can also benefit from the Welcome Home Loan to help get them into their first home.

The Welcome Home Loan aims to bridge the gap between your deposit savings and the new 20 per cent minimum deposit required by banks for a home loan.

You need to be earning $80,000 or less, or if going in with another person have a combined income of $120,000 or less.

You will also need to have saved at least 10 per cent of the purchase price as a deposit.

That 10 per cent can come from your KiwiSaver funds, savings, financial help from relatives, or the KiwiSaver first home deposit subsidy.

If you have contributed towards KiwiSaver for three years at the minimum percentage of your income and can meet all of the other eligibility criteria, you may qualify for the deposit subsidy, which is also administered by Housing New Zealand.

This could mean that you are given a subsidy of between $3000 and $5000 depending how long you have contributed towards your KiwiSaver account - a nice bonus that could help you into your first home.

The price of that home will need to come in under the regional price caps.

In Auckland, for example, you can use the Welcome Home Loan to buy a house worth up to $485,000 but the price cap varies across New Zealand to reflect differences in the price of an entry-level house.

More details are on the Welcome Home Loan website: www.welcomehomeloan.co.nz

*Disclaimer: Information provided is stated accurately to the best of the respondent's knowledge at the time of publication. It is general in nature and should not be construed, or relied on, as a recommendation to invest in a particular financial product or class of financial product. Readers should seek independent financial advice specific to their situation before making an investment decision.

To have your KiwiSaver questions answered by the Herald's panel of industry players email Helen Twose, helentwose@gmail.com.

- NZ Herald

Helen Twose

Personal finance and KiwiSaver columnist at the NZ Herald

Helen Twose is a freelance business journalist who writes regularly about KiwiSaver and entrepreneurial companies. She has written for the Business Herald since 2006, covering the telecommunications sector, but has more recently focused on personal finance and profiling successful businesses.

Read more by Helen Twose

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