Tax treatment for different types of entity

Sole Traders

Sole traders carry on business under their own name. All profits will be taxed at the sole trader’s marginal tax rate. If they have any tax losses, those can be offset straight against any income they have. This structure is suitable for small-medium or new business with less income and business assets. It is relatively easy to set up this entity and there is not much filing requirements.

One major downside of sole trader’s structure is that they has unlimited personal liability for the business debts. Thus, it is very risky to operate as sole traders as owner can lose their personal assets for the business debts.  This business type is very dependent on the owners. One tip for sole traders that it would be safer to transfer their private non-business assets to a family trust.

Partnership

Partnership is very similar to sole traders. Partnership is not a separate legal entity, thus general partners still have unlimited personal liability to cover for the partnership debts. Profits or losses for the year will be distributed to partners in accordance with the terms of the partnership deed. Individual partners then pay tax at the marginal tax rate.

Company

Company is a separate legal entity and it provides shareholders with limited liability to the business’s debt. It means that the shareholder of the company is not liable for the company’s debts, as their liability is only limited to their share of ownership in the company. Shareholders are owners of the company and they own shares in the company. Directors run and manage the company on behalf of shareholders. Director plays an important role in the company, as they own many duties and responsibilities to the company. In New Zealand, company must register through Companies Office. Company is the most popular form of entity in New Zealand. It is safer for owners to protect their private assets by setting up a company.

 Company is taxed at a fixed rate of 28%. If they have losses, it can be carried forward and offset with profit in the future. However, the 49 percent continuity of shareholding must be satisfied before carrying the losses.  

Trust

A trust is not a separate legal entity and the trustee of the trust will be liable for the trust debts. Although the beneficiary is the main party gaining the benefit of the trust, they are not liable for any trust debts.

Trust profit is taxed either under the trustee income or beneficiary income. If the income is not allocated to the beneficiary, trustee is liable for the tax and tax on trustee income is 33% flat rate. If income is distributed to beneficiary, it will be taxed at beneficiaries’ marginal tax rate. However, minor beneficiary (under the age of 16) is also taxed at a flat rate of 33%.  

For trust losses, it cannot be offset against trustees or beneficiaries profit. It can only be carried forward and offset against future trust income. However, there is no need to do the 49% continuity tests. 

Disclaimer: The following answer necessarily sets out general principles only. The facts of particular cases always need to be considered carefully, and it may be necessary to obtain advice from a tax expert.

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