Chapter 11 – Summary and Conclusion

11.1 Introduction
11.2 BE Regime
11.3 FIF Regime
11.4 Trusts
11.5 Disclosure
11.6 Imputation and Withholding Payment Systems
11.7 Summary of Recommendations
11.8 Conclusion


11.1 Introduction

11.1.1 This chapter briefly summarises the main elements of the BE, FIF and trust regimes and draws together all of the Committee's recommendations and some concluding remarks.

11.2 BE Regime

11.2.1 The BE regime recommended by the Committee is set out in chapters 2, 3 and 4 and follows closely that outlined in our first report. The regime will apply when five or fewer New Zealand residents hold interests, either directly or indirectly, or through nominees or associated persons, which add up to 50 percent or more of the rights or powers of ownership of a foreign company. The rules for determining whether a company is controlled are necessarily wide in scope. The rules for attributing the income of a controlled foreign company (CFC) to individual residents are more circumscribed. Income or loss will be calculated according to New Zealand tax rules, with some necessary modifications.

11.2.2 Residents with an income interest of 10 percent or more in a CFC will be required to compute their share of its income or loss, which is then attributed to them with a credit for the corresponding share of the foreign tax paid by the CFC. Residents would be able to aggregate their attributed income or loss, and the foreign tax credits, in respect of CFCs resident in the same jurisdiction. We propose that excess tax credits should be able to be carried forward. The New Zealand shareholders of a CFC resident in a grey-list country (Australia, Canada, France, Japan, West Germany, United Kingdom, United States) will be exempt from the regime unless the CFC utilises a significant tax preference. Where such a preference is used, the Committee recommends a simplified basis of income calculation.

11.2.3 In our first report, we suggested that a foreign company should be a CFC if it was controlled by 5 or fewer residents on any day of its accounting year. After further consideration, in light of the high compliance costs of monitoring control interests which in some cases could change, if not daily, relatively frequently, the Committee now recommends that a resident's control and income interests be measured on the last day of the calendar quarters that fall in the accounting year of a CFC. A foreign company would be a CFC if 5 or fewer residents have an aggregate control interest of 50 percent or more on any of the quarterly measurement days. This change necessitates more elaborate anti-avoidance measures than would be necessary if control and income interests on every day in the year were taken into account. A remaining problem is the circumvention of the BE regime by the disposal of shares for a capital gain, but this can be addressed comprehensively only by the general inclusion of capital gains within the income tax base.

11.2.4 With respect to the grey list countries, the Committee recommends that only significant tax preferences should be listed and that it would be best not to list specific preferences until there has been some experience with the BE regime. The fundamental criterion for listing a preference should be that it is significant enough to attract New Zealand investment. Where a preference is listed, the listing should have prospective application.

11.2.5 We proposed a number of transitional provisions in our first report. The principal provision is the exclusion from the BE regime for a two year period (ie until 1 April 1990) of interests in CFCs, resident in countries other than listed low tax jurisdictions, that were acquired by taxpayers on or before 17 December 1987. We recommend one further transitional measure in this report whereby residents with interests in CFCs on 17 December 1987 could elect to apply the regime for the two year period from 1 April 1988 until 31 March 1990 so that losses generated in that period would be available at the commencement of the regime on 1 April 1990 for offset against attributed income derived in the same jurisdiction.

11.3 Foreign Investment Fund (FIF) Regime

11.3.1 The FIF regime is set out in chapter 5 and section 245O of the draft legislation. The regime buttresses both the BE regime where tax deferral benefits do not depend on control and the proposed regime for superannuation where residents invest in foreign superannuation funds. It does this by taxing New Zealand residents on the income they derive through foreign companies, foreign unit trusts, or foreign superannuation funds ("foreign entities") which provide New Zealand residents with significant tax advantages.

11.3.2 The Committee has defined a FIF as any foreign entity which derives its income or value primarily or substantially from holding or trading portfolio investments in shares, investments in debt instruments, real property, commodities, etc, where the effect of the fiscal residence, the tax treatment applying to the entity in its country of residence and the distribution policy of the entity is to reduce the tax payable on the income of the entity to a level significantly below what it would have been had the income been taxed in New Zealand as it was derived.

11.3.3 We define an interest in a FIF in a similar way to an income interest under the BE regime, but this is extended to include life insurance or superannuation policies issued by a foreign entity. FIF income or loss is determined by reference to the change in value of the interest in the entity. We propose that there should be no credit for any foreign tax paid by the FIF because attributed FIF income or loss is effectively net of foreign tax. Attributed FIF income and losses of a taxpayer should, however, be able to be aggregated without limitation and, in addition, attributed FIF losses should be able to be offset against other income up to the extent of the past attributed FIF income returned by the taxpayer.

11.4 Trusts

11.4.1 The trust regime recommended by the Committee is described in chapter 6 and is set out in Part F of the draft legislation. We propose a number of changes from the regime recommended in our first report but these are of form rather than of substance. The basic principles underlying the proposed regime can be summarised as follows:

a   the taxation in New Zealand of the foreign-source income derived by a trust should not turn on the residence of the trustee. The material factor is the residence of the beneficiaries but since they are often not specified, recourse must be had to the settlor. In addition, a settlor will frequently have some influence, if not control, over the trustee so that the disposition of the income of the trust remains to some extent in the hands of the settlor. For these reasons, we consider that if the settlor is resident foreign-source trustee income should be taxable here;

b   where there is a resident settlor of a trust in the year in which it derives foreign-source trustee income, the liability for New Zealand tax on that income should rest in the first instance with the trustee (whether that trustee is resident or not). If the trustee is not resident, the liability should fall to the resident settlor as agent of the trustee in the event that the trustee defaults;

c   distributions from a trustee to a resident beneficiary should generally be taxable unless the trustee (or settlor, in the event of default) has been liable to tax in New Zealand.

11.4.2 We use the term "qualifying trust" to denote a trust in respect of which trustee income has been subject to tax in New Zealand in all income years since its settlement. Distributions from these trusts should be non-assessable to beneficiaries. "Foreign trusts", on the other hand, are trusts which have had, at no time after 17 December 1987, a settlor who is a New Zealand resident. We recommend that distributions from the trustee income of these trusts derived in income years commencing after 1 April 1987 should be assessable to a beneficiary, at his or her marginal tax rate, but other distributions from such trusts be exempt.

11.4.3 "Non-qualifying distributions" are distributions from trusts which are not qualifying or foreign trusts. We propose that these distributions, other than of the corpus of the trust, should be assessable to a beneficiary at a tax rate of 45 percent with no credit for any foreign tax, except withholding tax, paid by a trustee. The higher rate is intended as a proxy for an interest charge on tax deemed to have been deferred in respect of such distributions.

11.4.4 The Committee proposes that transitional provisions apply in respect of trusts settled by residents before 17 December 1987. These are that:

a   the settlor would have no liability, as agent of the trustee, for tax on the trustee income of the trust;

b   where such a trust winds up before 31 March 1989, all distributions other than of corpus and capital profits (which would be exempt) would be subject to a final tax of 10 percent;

c   where the settlor, trustee or a beneficiary of such a trust pays a tax equal to 10 percent of the net trust assets as at 31 March 1988, it would be treated as a qualifying trust provided that the trustee income of the trust is subject to tax in New Zealand in subsequent income years.

11.5 Disclosure

11.5.1 Disclosure of relevant information, with penalties for non-disclosure, and default methods where the taxpayer is not able to comply are critical to the effective operation of the regime. We outline our views on disclosure in chapter 7.

11.6 Imputation and Withholding Payment Systems

11.6.1 Our recommendations relating to the imputation and withholding payment systems cover details of the regimes which were left unsettled in our earlier report or which have emerged in the drafting of the legislation. There are no changes of substance or policy involved.

11.7 Summary of Recommendations

11.7.1 In summary, the Committee recommends that:

Definition of "Company" and "Trustee"

a   the definition of a "company" in section 2 of the Act be amended to include any entity which has a legal personality or existence separate from that of its members, which is created by way of incorporation or otherwise whether or not in New Zealand;

b   the definition of a trustee of a trust in section 2 of the Act be clarified to mean that trustee only in his or her capacity as a trustee of that trust and includes all trustees of that trust;

Residence: Individuals

c   the residence test applying to natural persons be amended with effect from the income year commencing on 1 April 1988 so that a person is deemed to be resident in New Zealand if he or she:

i   has a permanent place of abode in New Zealand; or

ii   is personally present in New Zealand for at least 183 days of any 12 month period; and

d   a person ceases to be resident in New Zealand only if he or she:

i   is absent from New Zealand for 325 days of any 12 month period; and

ii   has at no time during that period a permanent place of abode in New Zealand;

Residence: Companies

e   the residence test for companies be amended with effect from the income year commencing on 1 April 1988 so that a company, including a banking company, is resident in New Zealand if it:

i   is incorporated in New Zealand; or

ii   has its centre of director control in New Zealand; or

iii   has the centre of its executive management in New Zealand; or

iv   has its head office in New Zealand;

Definition of "Nominee"

f   for the purposes of the BE regime, a nominee of a person be defined to include:

i   a child of the person under 18 years of age, unless the person can establish otherwise;

ii   a bare trustee; and

iii   a person who has entered into an arrangement or understanding with that person with respect to the holding or exercising of rights or powers;

Definition of Associated Persons

g   in relation to the BE regime only, the term associated persons mean:

i   any 2 companies:

.   which consist substantially of the same shareholders, as presently defined in section 7; or

.   which are under the control of the same person or persons, as defined in section 7; or

.   where any group of persons holds income interests in each company totalling in aggregate 50 percent or more;

ii   any person and a company if that person holds an income interest of 50 percent or more in that company;

iii   two persons who are relatives if they are connected within the second degree of relationship;

iv   a partnership and any person, where that person is a partner of the partnership;

v   a partnership and any person, where that person and any partner are associated persons;

vi   a trustee of a trust and any person where that person (or any person associated with that person) has derived a benefit from that trust or, being a person associated with the settlor of the trust, could derive a benefit from it (except where the trust is for the benefit of employees only and the person, or an associated person, does not manage or control the affairs of the trust);

vii   a trustee of a trust and any person where that person (or a person associated with that person) is a settlor of that trust (except where such an association exists as a result of an employer settling a trust, such as a superannuation fund, for the benefit of employees only and the employer or any associated person does not manage or control the affairs of the trust);

viii   two persons who habitually act in concert with respect to the holding or exercising of interests in foreign companies, with respect to those interests;

Definition of Interests In a Company

h   residents' control and income interests in foreign companies be defined in terms of:

i   paid-up capital;

ii   nominal capital;

iii   rights to vote or participate in any decision-making concerning distributions, the constitution of the company or variations in its capital (e.g. by the issuing, redemption, acquisition or cancellation of any shares);

iv   income of the company which the person would be beneficially entitled to receive or to have dealt with in his or her interest or behalf if it were distributed; and

v   net assets of the company (or the proceeds from the realisation thereof) which the person would be beneficially entitled to receive or to have dealt with in his or her interest or behalf if they were distributed;

Frequency of Measurement of Interests

i   for the purposes of determining control and income interests in a foreign company, residents be required to measure their interests in the company in each category of interest listed in recommendation h on the last day of each calendar quarter;

j   an interest held on a measurement day be deemed to have been held on every day of the previous quarter;

k  provisions be included to reverse the effect of short term transactions and changes in the aggregate interests in foreign companies which have the effect of reducing the income attributed to residents or increasing an attributed loss;

l   residents who have a control interest in a foreign company at any time during its accounting year equal to or higher than 10 percent be required to disclose the interests they hold in the company on its balance date and any disposals of such interests made during its accounting year and where a resident has a control interest of 10 percent or more in a CFC at any time during its accounting year, the taxpayer be required to disclose the equivalent information in respect of the CFC;

Calculation of Control Interests

m   the control interest of a resident in a foreign company in any category of interest be defined as the aggregate of the person's direct and indirect control interests in that category and those of associated persons;

n   as a general principle, interests in a foreign company held by a CFC or associated persons of the CFC be attributed to the group of residents with the highest aggregate control interest in the CFC and, where there is more than one such group, to the smallest one and, where there is more than one person in any such group, the interests of the CFC be apportioned among them according to their income interests in the CFC;

o   any interests held by a nominee of a person be deemed to be held by that person;

p   a foreign company be defined as a CFC in respect of any accounting year of the company if, on any of the measurement days that fall within that accounting year, there are five or fewer residents whose aggregate control interest in the company in any category of interest is 50 percent or more;

q   where residents are directors of a foreign company and in aggregate have a control interest in the company in any category of interest of 50 percent or more, the company be deemed to be a CFC irrespective of the number of such directors;

r   where shares in a foreign company (the "stapled" company) can be transferred only in conjunction with the shares of a New Zealand resident company or a controlled foreign company, shares in the stapled company be deemed to be held by the New Zealand resident company or the controlled foreign company;

Calculation of Income Interests

s   the income interest of a resident in a CFC for any calendar quarter be the highest of the sum of the resident's direct and indirect income interests in the CFC on the last day of that quarter in the five categories of interest defined in recommendation h;

t   an entitlement to acquire an interest in a foreign company give rise to an income interest where:

i   the consideration payable to exercise the entitlement is less than the market value of the interest to be acquired; or

ii   the person holding the entitlement has given any form of financial assistance to the person holding the interest; or

iii   the holding of the entitlement has the effect of defeating the intent and application of the BE regime;

u   the income interest of a resident in a foreign company held through a CFC be calculated by multiplying the resident's direct income interest in the CFC by the CFC's direct income interest in the other company, and so on where the interest is held through more than one CFC;

v   the income interest of a person in a CFC for any accounting period of the CFC be calculated as the average of the person's income interests for the quarters which fall in that accounting period;

Attribution of Income and Losses

w   residents be exempt from the BE regime in respect of a CFC and an accounting year of the CFC where their income interest in the CFC for that year and that of any associated persons is less than 10 percent;

x   the attributed income or loss of a resident with respect to a CFC and any accounting year of the CFC be calculated by multiplying the resident's income interest in the CFC for that year by the BE income or loss of the CFC for that year;

y   an attributed loss of a resident not be recognised where the resident suffers little or no economic or financial loss;

z   where the aggregate income interests of 10 percent or more of residents in a CFC in any accounting year would otherwise exceed 100 percent, the income interest of each resident be apportioned downward so that the aggregate income interest equals 100 percent;

Adoption of CFC's Accounting Year

aa   residents be required to report attributed income in respect of a CFC in any accounting year in the income year in which the balance date of the CFC falls;

ab   where a foreign company changes its balance date, residents be required to obtain the Commissioner's consent to compute their control interests, income interests and attributed income or loss in respect of that company on the basis of its new accounting year and the Commissioner's decision apply to all residents with interests in the company;

ac   where a CFC changes its balance date to a later date and the Commissioner consents to the residents using the new accounting year, any attributed income of a resident for the resulting long accounting period be brought to account in the income year in which the old balance date falls;

Foreign Tax Credits

ad   subject to recommendation ae, income and withholding tax paid by a CFC be creditable under the BE regime;

ae   the proportion of the total income tax paid by a CFC that is creditable under the BE regime be the proportion of its total income that is taxable in its country of residence or the country of source of the income;

af   residents be able to aggregate their proportionate shares of the creditable taxes paid by CFCs resident in the same jurisdiction;

ag   the maximum credit allowable to a resident in any income year in respect of his or her aggregate attributed income derived from interests in CFCs resident in the same jurisdiction be the New Zealand income tax payable on that income in that year;

ah   residents be able to carry forward excess tax credits in respect of CFCs resident in the same jurisdiction for offset against New Zealand income tax payable in any future income year on attributed income in respect of CFCs resident in that jurisdiction;

ai   the carry forward of an excess credit by a company be subject to a 40 percent shareholding continuity test equivalent to that in section 188;

aj   a credit allowed to one company in a specified group of companies in respect of an income interest in a CFC be able to be transferred to another company in the specified group for offset against the New Zealand income tax payable by that company on attributed income derived from a CFC resident in the same jurisdiction as the first-mentioned CFC, subject to provisions equivalent to those in section 191;

ak   foreign income tax paid by a CFC in respect of income attributable to another CFC be deemed to be paid by the latter CFC;

Attributed Foreign Losses

al   an attributed loss of a taxpayer derived from an income interest in a CFC be able to be offset only against attributed income derived from income interests in CFCs resident in the same jurisdiction as the first-mentioned CFC in the same or a future income year;

am   the carry forward of an attributed loss by a company be subject to a 40 percent shareholding continuity test equivalent to that in section 188;

an   companies in the same specified group be able to aggregate attributed income and losses in respect of income interests in CFCs resident in the same jurisdiction subject to provisions equivalent to those in section 191;

Application of BE Regime to CFCs Resident in "Grey List" Country

ao   where a CFC resident in a grey list country utilises a listed significant preference in any accounting year, the BE regime apply as for CFCs resident in other jurisdictions except that the BE income or loss of the CFC be computed as its taxable income or loss for that year, measured according to the tax law of its country of residence (before taking into account any losses of the CFC incurred in other years or losses incurred by any other company), adjusted for the effect of the listed preference;

Definition of Foreign Investment Fund

ap   the foreign investment fund regime apply to interests in foreign companies, foreign unit trusts and foreign superannuation funds that fall within the definition of a foreign investment fund and that the definition of an interest in a foreign investment fund include policies of life insurance or superannuation issued by a foreign investment fund;

Treatment of FIF Losses

aq   residents be able to aggregate their FIF income and losses derived in any income year from all FIFs in which they have an interest;

ar   where a FIF loss derived by a resident in any income year exceeds his or her FIF income for that year, the excess loss be able to be deducted from other income of the resident derived in that year to the extent that the excess loss is less than an amount equal to the cumulative FIF income of the resident derived in earlier income years, less the sum of any excess losses set off against other income in those earlier years pursuant to this provision;

as   to the extent that a FIF loss cannot be set off against FIF income or other income derived in the same income year, it be carried forward for offset against FIF income derived in future income years;

at   the carry forward of a FIF loss by a company be subject to a 40 percent shareholding continuity test similar to that in section 188;

au   a FIF loss incurred by one company in a specified group of companies be able to be offset against FIF income derived by another company in the specified group subject to provisions equivalent to those in section 191;

Entry and Exit From FIF Regime

av   a deemed acquisition or disposal at market value occur when:

i   a person becomes or ceases to be a resident;

ii   a person disposes of an interest by way of gift or for a consideration which is less than its market value;

iii   a person dies;

iv   an interest in a FIF becomes an income interest in a CFC of not less than 10 percent; or

v   an income interest in a CFC of not less than 10 percent ceases to be such an interest but is an interest in a FIF;

Trusts

aw   the present distinction between specified and non-specified trusts in sections 226 to 233 of the Act be removed from 1 April 1988;

Trustee Income

ax   a trustee be liable for tax on trustee income derived outside New Zealand in any income year in which the trust has a settlor who is resident in New Zealand at any time during the year;

ay   subject to the recommendations bb, bc and bd, where a trust was settled after 17 December 1987, any resident settlor of the trust be liable for tax on trustee income as agent of the trustee except where the trust has a resident trustee who is a natural person or a trustee company within the meaning of the Trustee Act 1956;

az   a settlor or trustee of a trust be permitted to elect to make foreign-source trustee income subject to tax in any income year by making a return of such income by the due date;

ba   a trust in respect of which trustee income has been subject to tax in New Zealand, in the hands of either the trustee or the settlor, in every income year since the settlement of the trust be defined as a "qualifying trust";

Settlor Liability: Superannuation Funds

bb   a person who makes a settlement on a trust that is a superannuation fund, as that term is to be defined for the purposes of the new tax regime for superannuation, not be liable for tax on the trustee income of the trust;

Settlor Liability: New Residents

bc   persons who become resident in New Zealand after 17 December 1987 who have settled a trust before becoming resident not be liable for tax on trustee income in respect of that trust, provided that they have not previously been resident in New Zealand since 17 December 1987;

Settlor Liability: Charitable Trusts

bd   a person who makes a settlement on a charitable trust not be liable for tax on the trustee income of the trust;

Beneficiary Income

be   the beneficiary income of a beneficiary of a trust be defined as income derived by the trustee of the trust in any income year which:

i   vests absolutely in interest in a beneficiary during the income year; or

ii   is paid or applied by the trustee to or for the benefit of the beneficiary during the income year or within 6 months of the end of the income year whether or not the beneficiary is an infant or is subject to any other legal incapacity;

bf   the credit allowed to a beneficiary of a trust in respect of tax paid by the trustee of the trust in any income year be equal to the proportion of the total tax paid by the trustee in that income year that the beneficiary income of the beneficiary bears to the total income derived by the trustee in that income year;

bg   the trustee of a trust continue to be liable for tax on beneficiary income as agent of the beneficiary;

bh   the definition of a distribution encompass indirect distributions received from a trustee;

Distributions From Qualifying Trusts

bi   all distributions from the trustee of a qualifying trust (other than beneficiary income) be non-assessable in the hands of resident beneficiaries;

Distributions From Foreign Trusts

bj   distributions from a foreign trust be taxable to a resident beneficiary to the extent that they are made out of trustee income derived in any income year commencing after 1 April 1988 but all other distributions from a foreign trust, other than beneficiary income, be exempt;

bk   distributions from a foreign trust be deemed to be made first from the most recent income year of the trustee and, with respect to any income year, first, from taxable income derived by the trustee in that income year and, secondly, from non-taxable gains derived in that year;

bl   distributions of capital profits realised in transactions directly or indirectly with associated persons be treated as taxable distributions;

bm   corpus be defined as any property settled on a trust by natural persons valued at its market value at the time of settlement other than:

i   property settled directly or indirectly, whether by one transaction or a series of transactions, by a trustee of another trust;

ii   property that would have constituted assessable income of the settlor but for the fact that it is diverted to the trust; and

iii   property in respect of which a deduction can be claimed by the settlor in calculating his or her assessable income;

bn   where a distribution is deemed to be a taxable distribution other than beneficiary income, a credit for any foreign withholding tax be permitted such that the withholding credit does not exceed the proportion of the total withholding tax paid that the taxable distribution makes up of the total distribution;

bo   the rate of tax applying to distributions from foreign trusts be the marginal tax rate of the recipient;

Distributions From Trusts Settled By New Residents

bp   where a trust is settled by a new resident before the person becomes resident in New Zealand and the trustee or the settlor of the trust meets the New Zealand tax liability for tax on the foreign- and New Zealand-source trustee income of the trust in every income year after the settlor becomes resident:

i   distributions from the trust which are attributed to income years ending before the settlor becomes resident be treated as distributions from a foreign trust; and

ii   distributions from the trust attributed to income years ending after the settlor becomes resident be treated as distributions from a qualifying trust;

Non-Qualifying Distributions

bq   distributions from a trust which are not distributions from a qualifying trust or a foreign trust ("non-qualifying distributions"), other than such distributions which are beneficiary income or distributions of corpus, be taxable at a rate of 45 percent;

br   non-qualifying distributions be deemed to be made first from sources other than corpus;

bs   a credit be permitted for foreign withholding tax paid on a non-qualifying distribution but not for any income tax paid by the trustee;

Financial Assistance to Trusts

bt   where a distribution from a trust would be a non-qualifying distribution and:

i   a resident settlor of the trust has a loan outstanding to the trustee and the rate of interest is less than the prescribed interest rate applying for fringe benefit tax purposes, the settlor be assessed on interest on the loan outstanding computed at that rate, less any interest actually assessed to the settlor in respect of the loan; or

ii   a resident settlor has a form of financial assistance, other than a loan, outstanding to the trustee of the trust, such as a guarantee, the settlor be assessed annually on an amount equal to the consideration that would have been payable in an arms length transaction, less any consideration returned as assessable income of the settlor;

Residence of a Beneficiary

bu   where a resident ceases to be a resident and within 5 years again becomes a resident, any taxable distributions received by the person during the period in which he or she was not resident, other than distributions from a qualifying trust, be assessable in the income year in which the person commences to be resident;

Disclosure: BE Regime

bv   the Commissioner be given a general power to require the disclosure of sufficient information to establish the nature of any interest a taxpayer has in a foreign entity, whether or not the entity is a CFC, and to compute the taxpayer's attributed foreign income or loss;

Disclosure : Trusts

bw   provision be included in the legislation to permit the Commissioner to require disclosure of information from residents who are settlors of trusts in existence on or after 1 April 1988;

Default Methods

bx   provision be included in the legislation for the calculation of the income or loss of a taxpayer where the taxpayer is unable to obtain sufficient information or where there is failure to disclose information;

BE Regime Transition

by   taxpayers be entitled to elect, in respect of all of their income interests held on 17 December 1987 in all CFCs resident in countries other than those on the transitional list, to apply the BE regime for the accounting years of such CFCs falling in whole or in part during the period 1 April 1988 to 31 March 1990;

bz   for the purposes of calculating the attributed loss of a taxpayer in respect of each such CFC in the transitional period, the taxpayer's income interest on any measurement day be taken as the lesser of the taxpayer's income interest on that day and the income interest he or she held at 17 December 1987;

Trust Transition

ca   where a trust has been settled on or before 17 December 1987, distributions from the trust, other than distributions of capital profits or corpus, be subject to a final tax in the hands of the beneficiary at a rate of 10 percent and distributions of capital profits and corpus be exempt provided that all of the property of the trust is distributed before 1 April 1989;

cb   where a trust settled on or before 17 December 1987 is not a qualifying trust or a foreign trust and a beneficiary, settlor or trustee of the trust pays to the Commissioner no later than 7 February 1989 an amount equal to 10 percent of the net assets of the trust as at 31 March 1988, New Zealand income tax be deemed to have been paid on the trustee income of the trust in prior income years;

Allocation Rules

cc   where the credit ratio of a dividend applied by a company exceeds the maximum ratio, the excess credit not be allowed to shareholders, nor included in the definition of a dividend; and

cd   a ratio change declaration be able to be made at any time before the first distribution at the changed ratio is distributed;

Deemed Dividends: Allocation Rules

ce   deemed dividends be excluded from the allocation rules where they arise in respect of benefits given to shareholders by way of the sale of company property to a shareholder at an inadequate consideration; the purchase of property from a shareholder by a company for excessive consideration; loans to shareholders other than bone fide loans at commercial interest rates; non-deductible expenditure enjoyed by proprietary company shareholders and associates; and excessive remuneration to directors or shareholders of proprietary companies, or their relatives;

Producer Boards

cf   the producer boards be able to operate an ICA and WPA for the purposes of allocating credits to their constituent producers and a BETA for the purposes of relieving double taxation of income derived under the BE regime;

cg   a board be able to allocate credits to either payments made to producers, which would be non-deductible and treated as dividends for tax purposes, or to notional dividends and in either case the amount of the dividend be computed on the basis that it is fully credited;

ch   an allocation of credits by a board to its producers by way of cash and/or notional dividends be made only once in each income year;

ci   the credits allocated by a board to its producers be in proportion to the product payments made or payable by the board to its producers and/or in proportion to the levies paid or payable by producers to the board;

cj   the boards be able to maintain records for tax purposes in which to credit the net amount of notional dividends allocated (i.e. the gross notional dividends allocated less the amount of the credits attached to them);

ck   the notional capital of a board be able to be distributed tax free to producers;

Co-operative Companies

cl   co-operative companies be treated in the same way as the producer boards for the purposes of imputation except that they also have the option available to other companies of allocating credits to dividends or taxable bonus shares;

Sharemilking Arrangements

cm   where payments by a dairy company for milk supplied are made directly to a sharemilker and the land-owner, dividends or bonus shares and attached credits paid on the basis of product supplied should be paid directly to both persons on the same basis that payments for milk supplied would be made;

Capital Distributions

cn   with effect from 1 October 1988, a return of capital made by a company on the redemption of shares (including debentures issued on or after 1 October 1988 which come within sections 192 or 195 of the Act), other than on winding up, be exempt from tax in the hands of the recipient provided that:

i   the shares are issued on terms such that they are to be redeemed at a specified date or dates or within a specified period; and

ii   the capital returned is equal to the amount paid in, including any premium, on the subscription of the shares; and

iii   the shares redeemed were not issued pursuant to an arrangement under which they were to be redeemed in a regular or systematic way such that it may reasonably be concluded that the return of capital is made in lieu of a dividend;

Carry Forward of Credits by a Company

co   a 75 percent commonality of shareholding (using the tests presently contained in section 188 of the Act but extended to include fixed dividend shares) be required for a company, other than a company listed on the New Zealand stock exchange or a wholly-owned subsidiary of such a company, to be able to carry forward the credit balance of its ICA, WPA or BETA;

Carry Forward of Unutilised Imputation Credits

cp   all resident taxpayers, other than companies, be able to convert any imputation credits in excess of their tax liability in any income year into a tax loss to be carried forward, with the amount of the loss calculated as the total amount of the unutilised credit divided by 0.28;

Refunds of Dividend Withholding Payment

cq   refunds of dividend withholding payment to all shareholders, irrespective of their residence or tax status, be made by the Department after the end of the income year in which the corresponding withholding credit was received;

cr   where a withholding payment credit is allocated to a dividend paid to a non-resident, the non-resident withholding tax payable on the dividend be offset to the extent of the withholding payment credit;

Integration With BE Regime: Individuals

cs   where a non-corporate taxpayer elects to establish a branch equivalent tax account, the amounts to be credited to the account be the attributed income derived by the person under the BE regime;

Definition of Dividend

ct   the definition of a dividend be extended with effect from 1 October 1988 to include, with respect to any person who is a shareholder of a company or, where the company is a proprietary company, an associate of a shareholder:

i   the value of any benefit or property provided by the company to the person to the extent that it exceeds any consideration provided by the person for the provision of the benefit or property; and

ii   consideration provided by the company upon the acquisition of property from the person to the extent that it exceeds the market value of the property acquired by the company;

Section 190

cu   the proviso to section 190 be amended, with effect from the commencement of the 1990 income year, to limit its application to resident recipients of remuneration;

Section 197

cv   section 197 be retained;

Winding Up Distribution Tax

cw   distributions which have been subject to the winding up distribution tax not be liable for either non-resident withholding tax or dividend withholding payment;

Fringe Benefits Received by "Major Shareholders"

cx   fringe benefits received by any shareholder who is an employee be subject to the FBT regime rather than the current deemed dividend provisions:

i   in respect of fringe benefits other than loans, with effect from 1 April 1988; and

ii   in respect of loans, with effect from 1 October 1988;

Excess Retention Tax

cy   excess retention tax be retained;

cz   non-taxable bonus issues made after 30 September 1988 be excluded from the calculation of dividends distributed by a privately controlled investment company for the purposes of excess retention tax calculation; and

da   the exemption from ERT for companies without share capital be repealed with effect from the 1990 income year.

11.8 Conclusion

11.8.1 The Committee's recommendations outlined above are incorporated in the draft legislation contained in the accompanying annex. Further refinement of the draft will be needed as it is examined by parliamentary counsel and officials. Interested parties will then have an opportunity to comment at the select committee stage. The experience of other countries has been that CFC regimes need relatively frequent amendment to meet changing business practices and no doubt that will be the case with the New Zealand regime. The increasing internationalisation of businesses and financial markets also makes it inevitable that tax legislation will become more complex, though this will affect only a small number of taxpayers.

11.8.2 The real test of the draft legislation will, however, come as it is applied. It is impossible to anticipate all of the circumstances that may arise. We are, however, confident that the basic framework of the regimes, as embodied in the draft legislation, is sound.