Answer To claim a tax deduction for payments to family members for services:
- the family member must provide services to your business;
- the amount paid must not be excessive; and
- if the family member is your spouse or partner, you must have the Commissioner’s prior approval for a deduction unless you run your business through a company.
You cannot split the income you earn between your family members for income tax purposes. To claim a tax deduction for payments to a family member for services, the family member must provide services to your business and the amount paid must not be excessive. You must not pay the family member more than what you would pay a non-family member for the same services. In addition, if the family member is your spouse or partner, you must have the Ird’s prior approval for a deduction unless you run your business through a company. Here are some more details for each points mentioned above.
Family member must provide services to your business
You must be able to show that the family member provided services to your business. This is even if you have the ird’s prior approval to deduct the payment. Depending on the circumstances, the types of evidence that might be relevant include:
- a wage book or diary (manual or electronic) recording the dates, hours worked, and nature of the services provided by the family member;
- a vehicle log book recording the dates and nature of business travel undertaken by the family member and other documentation supporting the purpose of the travel such as invoices for parking and other services or goods acquired or provided on the dates travelled;
- copies of any PAYE payment information;
- an employment contract or contract for services;
- if the family member is an independent contractor or otherwise in business on their own account, invoices detailing the nature and extent of the services provided;
- bank statements or other documents showing the amounts you paid to the family member for the services provided.
Payments must not be excessive
The amount paid must not be excessive for the services the family member provides. This includes where you have the ird’s prior approval for a deduction and subsequently the amount you pay your spouse or partner, or the hours they work, or the nature of the services they provide changes. If the amount paid is excessive, the ird 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.
Ird’s prior approval
If the family member is your spouse or partner, you must have the ird prior approval for a deduction, unless you run your business though a company. Approval is required whether you pay your spouse or partner a salary or wages, a commission, or another amount for services.
Approval may be granted only if:
- the Commissioner considers the payment is for services rendered;
- the services are not domestic services or otherwise services connected with the home, although, if you are a farmer, the Commissioner may approve a deduction for amounts you pay your spouse or partner to cook for farm employees;
- the services are provided in earning income from your business;
- a deduction for the payment has not been claimed.
To apply for approval, you need to send the Commissioner details of:
- the nature of your business;
- full details of the services your spouse or partner provides;
- the average number of hours your spouse or partner works each week and the number of weeks worked each year;
- if others provide the same services to your business as your spouse or partner, details of the services the others provide and the payments you make for them; and
- the amount you pay your spouse or partner and how the amount is paid (for example, at regular intervals or periodically or by crediting an account).
If you run your business through a company, prior approval is not required to deduct payments to your spouse or partner for services. However, services must be provided and the amount paid must not be excessive.
