A paper released this week for public feedback aimed to make the current tax rules for closely held companies more workable.
There were specific tax rules available for such companies, he said.
However, a range of concerns had been brought to his attention about the workability of the look-through company rules introduced in 2011.
''If the rules are not working as intended they could be distorting business decisions as well as deterring more businesses from becoming look-through companies,'' Mr McClay said.
Deloitte Dunedin tax partner Peter Truman said closely held companies were companies where there were five or fewer shareholders controlling the company.
There were a large number of closely held companies, often with one or two shareholders, who carried on a wide range of trades, professional services, farming, property ownership and investment activities.
Companies were often used for commercial reasons, including creditor protection, ease of transfer and separation from other business activities undertaken.
The tax treatment of companies, because they were separate legal entities from their owners, often generated tax compliance issues not existing for sole traders or partnerships, he said.
Governments over the years had sought to alleviate some of those issues through the introduction of concessions for qualifying companies and look through companies.
''While these regimes have mitigated some of the tax issues arising with ordinary companies, they do have consequences which can cause unintended tax outcomes. The move to deal directly with some tax issues that continue to cause concern is therefore welcome.''
The proposals that would make a significant difference included: Being able to elect not to deduct resident withholding tax (RWT) on dividends and interest paid by closely held companies.
Allowing shareholder salaries to be taxed through a mixture of PAYE and provisional tax.
Currently it was necessary to tax shareholder salaries under either the PAYE or provisional tax rules, but not both.
Reforming the rules which applied to capital gains realised with associated persons.
Allowing all companies not to deduct RWT on fully imputed dividends paid to shareholders which were companies. Currently, the company tax was 28%.
However, dividends paid must have 33% of tax credits attached - usually a combination of imputation credits and RWT.
Providing some common-sense solutions where loans provided to shareholders to look-through companies were remitted due to the insolvency of the look-through company.
Under current rules, the economic benefit of the debt remission to the look-through company was taxed to the shareholder.
But that was an unreasonable outcome as the shareholder had a non-deductible loss on the loan they had made to the company.
Explanation
Closely held companies, which typically have only a few shareholders, make up a significant proportion of New Zealand's 400,000 incorporated companies. Given the nature of these businesses, there are specific tax rules available to ensure the decision whether to convert a small business to a company is not driven by tax considerations. One such example is the look-through company (LTC) regime. The LTC rules introduced a regime which created a transparent outcome for companies electing into the regime. The rules were introduced in 2010 to replace the loss-attributing qualifying company rules and allow income and expenditure of a company to be allocated to the shareholders in proportion to their interest in the company. When the LTC rules were introduced, the qualifying company (QC) regime was grandparented meaning that companies that were already QCs could continue to be so. At the end of the 2014 income year, there were approximately 50,000 LTCs and 70,000 QCs.
