Will the income splitting rules apply to you?

The Revenue introduced draft legislation known as the income splitting/shifting rules that were to apply from April 2008. They've since delayed the application of these rules to allow for more consultation. The broad effect of the new income splitting/shifting rules is to prevent you from including your spouse as a shareholder in your company and using their basic rate tax band for dividend extractions. Therefore if you perform most of the work within the company dividends will primarily be taxed on you - irrespective of the fact that you may be equal shareholders with your wife. Therefore if you own a company jointly with your wife you should consider whether the income shifting legislation would will apply. Although there's obviously going to be some changes it's nevertheless worthwhile assessing how the provisions could apply. As the income shifting legislation doesn't apply to arms length commercial arrangements the first issue would be to assess whether the work done by each shareholder reasonably justifies the level of reward received, taking into account: - the type of work undertaken; - the amount of work done; and - the extent of their responsibility for making key decisions in the running of the business. Therefore the total amount extracted from the company by you and your spouse would be compared to the market rate. The amount of capital would however be taken into account. The investment of capital by you or your spouse would warrant a particular level of return. If your spouse invested an amount into your company the expected annual return on this if invested elsewhere would be deducted from the income that would otherwise be classed as having 'shifted' to them. It's also worthwhile noting that the income shifting rules will only apply where there is a tax advantage involved. Therefore if you and your spouse received other income that pushed you both into the higher rate tax band any dividends that were classed as shifted would not bring a tax advantage (as the effective rate would still be 25%) and therefore the new legislation would not apply. It's pretty certain that this legislation will be introduced at some point. Sure, it's likely to change from the original provisions but nevertheless these should be borne in mind for any future extractions.