Investing Through A Company Calculator

The appeal of holding investments in a company is easy to state and slightly misleading. The company rate is 28% while the top personal rate is 39%, so moving a portfolio into a company looks like an eleven point saving on every dollar it earns. The problem is that the calculation stops halfway. Money inside a company is not yours in any spendable sense, and getting it out is a taxable event that finishes the job the company started. When profits are distributed, imputation credits pass on the tax the company already paid, dividend withholding tax applies to the grossed-up amount, and a shareholder above 33% pays the remaining difference in their own return. Follow the whole chain and the total tax on the income lands exactly on the shareholder's marginal rate, which is where it would have landed had the company never existed. What the company genuinely provides is timing. Tax above 28% is postponed for as long as profits stay retained, and over a long enough period that deferral compounds into a real number worth having. What it cannot provide is the thing people are usually reaching for, which is a lower final rate, and there is an alternative that does exactly that. A portfolio investment entity taxes income at your prescribed investor rate, capped at 28%, and that is the end of it. No top-up arrives later, which makes it a permanently lower rate rather than a deferred one.

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The Calculation That Stops Too Early

Comparing 28% against 39% and concluding a company saves eleven points is the single most common error here, and it comes from stopping at the company accounts.

Money in a company is not spendable money. Extracting it triggers the rest of the tax, and the imputation system exists precisely to make sure the total ends up at the shareholder's rate rather than the company's.

On $100,000.00 of income the company pays $28,000.00 and you eventually pay $11,000.00 more. The total is $39,000.00, which is 39% of the income, which is what you would have paid anyway.

Worked Example: $100,000 Of Investment Income

Company tax: $28,000.00, leaving $72,000.00 of retained profit.

Distribution: the $72,000.00 carries a $28,000.00 imputation credit at the maximum 28:72 ratio, making a gross dividend of $100,000.00.

Dividend RWT: 33% of $100,000.00 is $33,000.00, reduced by the $28,000.00 credit, so $5,000.00 is withheld. You receive $67,000.00 in cash.

Your top-up: at 39% you owe a further $6,000.00.

What you keep: $61,000.00. Through a PIE you would keep $72,000.00.

A Cap Beats A Deferral

The PIE does the thing people hoped the company would do, and does it permanently.

Income taxed at a 28% prescribed investor rate is finished. There is no further liability when you withdraw, no top-up in your return, and no distinction between money inside the wrapper and money in your hand.

That is a genuinely lower rate rather than a postponed one, and for a 39% earner it is worth $11,000.00 on every $100,000.00 of income. Our PIE savings vs bank savings calculator works the same comparison against ordinary interest.

What The Company Genuinely Gives You

Timing, and it should not be dismissed.

While profits stay retained, only the 28% has been paid and the remaining eleven points keep working. On $500,000.00 at 6.00% that is worth $17,980.89 after ten years and $65,729.19 after twenty, measured against holding the same portfolio personally at 39%.

The catch is that the benefit requires the money to stay put. Draw on it regularly and the top-up arrives regularly, which returns you to paying your marginal rate as you go.

The Costs That Do Not Depend On Any Of This

A company has to be run whether or not the structure is working for you.

Annual financial statements, a company tax return, an imputation credit account to maintain, an annual return to the Companies Office, and usually an accountant to keep it all correct. Those costs recur every year and do not scale down for a small portfolio.

Set them against a deferral benefit that starts at $924.00 in the first year, and a modest portfolio can plausibly spend more on compliance than the structure returns. Our business surplus cash calculator covers the related case where a company already exists and holds cash.

When A Company Still Makes Sense

Usually when it exists for reasons that have nothing to do with the tax rate on investment income.

An operating business with genuine surplus, a structure needed for liability separation or for several people to co-own something, or profits that will realistically be retained for decades can each justify it. So can succession planning, which no rate comparison captures.

What rarely justifies it is forming a company purely to hold a personal share portfolio, because the alternative is both cheaper to run and taxed at a lower final rate. Our investing through a trust calculator covers the other structure people reach for, which has its own quite different arithmetic.

Check Your PIR Before Assuming Any Of This

Everything above assumes the top prescribed investor rate of 28%, and plenty of people are entitled to less.

If your PIR is 17.5%, a PIE is better still. If your marginal rate is 17.5% then neither structure helps, since you would be paying 28% on income that is only taxed at 17.5% in your own hands, and the last row of the comparison table turns negative.

Our retirement withdrawal sequencing calculator works out the correct PIR from both statutory tests, and it is worth checking before drawing any conclusion from this page.

Related NZ Investment Structure Calculators

• Investing Through A Trust Calculator: the other structure, with different arithmetic.
• PIE Savings vs Bank Savings Calculator: the PIE rate against ordinary interest.
• Business Surplus Cash Calculator: where company cash should sit.
• Retirement Withdrawal Sequencing Calculator: finding your correct PIR.
• PIR Overpayment Recovery Calculator: recovering tax paid at the wrong PIR.