A recent legislative change has amended the definition of “close company” for income tax purposes. While the change seems minor, inserting the words “or trustees” into the definition, the ramifications for shareholders in closely-held family companies could be more significant, particularly where those shareholders receive Working for Families tax credits.

Previously, to be a close company, a company had to have five or fewer natural persons (individuals) holding more than 50% of the voting interests in the company. This precluded a company where trustees held most of the voting interests from being a close company. Therefore, if you and your partner each held ten shares in the family company and your family trust held the balance, your company was not a close company.

Not being a close company meant that your company was not subject to provisions in the income tax legislation that apply only to close companies. For example, your company was not subject to the mixed-use asset rules, rules about excessive remuneration, and benefits provided to shareholder-employees. It was also unable to elect out of the fringe benefit regime for motor vehicles provided to shareholder-employees. Not being a close company also meant that a shareholder with a 10% or greater interest in the company did not need to include a share of the company’s income in their family scheme income to calculate their Working for Families Tax Credit entitlement.

The amended definition means that a company with five or fewer natural persons or trustees holding more than 50% of the voting interests in the company is now a close company. This increases the number of companies that will be close companies for income tax purposes. This will mean that if your company has majority trust ownership it may now be a close company and subject to some new tax rules, which could be both good and bad. Importantly this change could affect your entitlement to Working for Families tax credits. You may now need to include a share of the company’s income in your family scheme income and reduce your Working for Families tax credit.

For more information on how this change in the definition will affect you and your company contact your Findex adviser.