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When is a market salary unable to be paid?
Hamish Pryde • Sep 21, 2011
When is a market salary unable to be paid?
Following on from the Penny & Hooper case, there are however times when a market salary cannot be paid.
Examples of this :
- The business hasn't made enough money to cover a market salary, but what profits there are have been paid out to the worker;
- It is financially prudent to retain some profits in the business because it is anticipated that the business may experience financial difficulties in the near future;
- The profits are set aside to acquire business assets in the next financial year; or
- The business relates to a charity and the individual receives less to ensure the charity's return is maximised.
There may be other non-tax reasons why a business may pay the individual less than an arm's-length party would receive over the short-term. However, in those circumstances, there should be no significant distributions being made to entities associated with the individual.
If the reasons above exist, then the non-payment of a market salary should be a legitimate tax position.
If in doubt, ask your Chartered Accountant.
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