Clarification of the "Dividend" definition
Issue: General support for changes
Submission
(Corporate Taxpayers Group, Russell McVeagh, Deloitte, KPMG, New Zealand Institute of Chartered Accountants, New Zealand Law Society)
The submitters support the proposal to clarify the dividend definition so that share splits involving subdivisions, rights issues[1] and premiums paid under bookbuild arrangements[2] do not constitute dividends.
The submitter agrees that share splits should be included in the definition of “bonus issue” rather than being explicitly excluded from being a dividend. This approach preserves a company’s ability to elect to treat a share split as a dividend, by virtue of it being a taxable bonus issue. (New Zealand Law Society)
Comment
Support for clarification noted.
Recommendation
That the submission be noted.
Issue: Change to wider dividend definition
Submission
(Corporate Taxpayers Group, Russell McVeagh, Deloitte)
Rather than making ad hoc changes to the dividend definition, the current problem can be overcome by amending section CD 5(1) of the Income Tax Act 2007 (the section entitled “What is a transfer of value?”) by replacing the word “provides” with “transfers” or “distributes”.
Comment
As noted in the regulatory impact statement, Clarification of dividend definition, to deal with the current uncertainty officials considered amending the general dividend definition in section CD 5. The key issue with amending the general dividend definition is that there may be unintended effects (for instance, arrangements that should be taxed as a dividend may be unintentionally excluded).
Replacing the word “provides” with “transfers” or “distributes” as suggested by submitters does not necessarily address the current uncertainty relating to the issue of shares. While it is arguable that the issue of a share by a company is not a transfer or distribution (and therefore in line with policy) the opposite is also arguable. This is because the company creates the share and then transfers or distributes it to the new owner. It is this uncertainty which is the source of the problem that officials are trying to deal with. Overall, we consider it is unlikely that replacing “provide” with “transfer” or “distribute” will be decisive. It will merely draw attention to the problem without solving it.
In addition, the term “provide” may, in some situations not involving an issue of shares, be more appropriate than “transfer” or “distribute”. For instance, the use by a shareholder of the company’s property is also intended to be a dividend. If the ordinary meaning of the word “transfer” or “distribute” is adopted there is an argument that the company does not transfer or distribute the property, or the use of the property, to the shareholder. Therefore in this case “provide” may be a more appropriate term (because the use of the property is provided to the shareholder). It is important not to risk excluding from the general definition of “dividend” these situations in which a shareholder receives a private benefit from the use of a company’s resources.
Recommendation
That the submission be declined.
Issue: Confirmation that changes are for clarification only
Submission
(Corporate Taxpayers Group, Deloitte)
If the overarching definition is not amended, it should be made clear that the exclusions are being enacted for clarification only and not because these arrangements or similar arrangements necessarily involve a transfer of value.
Comment
Officials confirm by way of this officials’ report, that the changes to the dividend definition are to clarify that rights issues, premiums paid under bookbuild arrangements and share splits are not dividends. This is not a change in policy and the change, in itself, does not imply that other arrangements fall within the dividend definition. A similar statement confirming the clarifying nature of these changes will be made in the Tax Information Bulletin article that is published after the tax bill is enacted.
Recommendation
That the submission be accepted.
Issue: Income under ordinary concepts
Submission
(Corporate Taxpayers Group, Russell McVeagh, Deloitte, New Zealand Institute of Chartered Accountants, Ernst & Young)
The bill should clarify that no income arises under ordinary concepts in respect of the particular transactions. The main area of taxpayer uncertainty in the case of rights issues is not whether a dividend arises but whether income arises under ordinary concepts, as was held to be so by the High Court of Australia, Commissioner of Taxation v McNeil. If this clarification is not made, there is a potential to create greater uncertainty than currently exists.
Comment
The proposed amendments to clarify the dividend definition so that certain transactions are not dividends arose because the rewritten definition of “dividend” (from the Income Tax Act 1994 to the Income Tax Act 2004) unintentionally broadened the dividend definition. The amendment was not made in response to the McNeil decision in Australia. Therefore officials do not consider the proposed changes infer that the particular transactions would be income under ordinary concepts. That is, the proposed amendments are not relevant to the scope of section CA 1(2) (the provision which states that an amount is income for a person if it is income under ordinary concepts).
In general, whether something is income under ordinary concepts is, and should continue to be, a matter of interpretation dependent on the facts of any particular case. “Income under ordinary concepts” has been a feature of the law since income tax was introduced and officials do not consider it is necessary to amend this longstanding core feature of income tax law.
Furthermore, there are considerable differences between the Australian and New Zealand tax legislation (such as the existence of a comprehensive capital gains tax in Australia). It is important to note that Australian case law is not binding on New Zealand courts, and there have been tax cases when the two jurisdictions have reached different conclusions.
Recommendation
That the submission be declined.
Issue: Clarification of the transactions to which subsection CD 29B(2) applies
Submission
(Corporate Taxpayers Group, Russell McVeagh)
Proposed subsection CD 29B(2) should be clarified, as it could be read as being limited to rights issues where the rights relate to shares in the same class as those held by the shareholder to whom the right was issued. If this is intended, there is no clear rationale provided for this limitation.
Comment
It is not intended that the scope of proposed subsection CD 29B(2) be limited by the class of the share being issued. Officials agree that the drafting should be amended to ensure the intended result is achieved.
Recommendation
That the submission be accepted.
Issue: Scope of proposed subsection CD 29B(2)
Submission
(New Zealand Law Society)
Where a person subscribes for shares for less than their market value, there is no loss to the company. There is only a loss to the other shareholders. Accordingly, this transaction should not give rise to a dividend in any circumstance. To address this, paragraphs (a) and (b) of proposed subsection CD 29B(2) should be deleted. Currently section CD 29B(2) reads:
“Issue of shares under rights to subscribe for shares
“(2) The issue by a company of a share to a person for consideration less than the market value, immediately before the issue, of a share in the same class of shares, is not a dividend if—
“(a) the person subscribes for the share under a right (a subscription right) issued by the company to a shareholder holding shares in the share class before the issue of the right; and
“(b) the company does not, as part of the issue of the subscription right, give the person a right to dispose of the share to the company.
Comment
Deleting paragraphs (a) and (b) would mean subsection CD 29B(2) reads “The issue by a company of a share to a person for consideration less than the market value, immediately before the issue, of a share in the same class of shares, is not a dividend”.
Paragraphs (a) and (b) of proposed subsection CD 29B(2) are necessary because they ensure that the dividend exclusion only applies to particular rights issues and deleting these paragraphs could lead to the wrong result. For example, under current policy settings bonus shares issued under an arrangement where shareholders can elect whether to receive bonus shares or money or money’s worth (bonus issues in lieu), are taxable. There are good policy reasons for treating a bonus issue in lieu as taxable and as part of the current changes we do not propose to review this treatment. If this submission was accepted, a bonus issue in lieu may fall within the section CD 29B dividend exclusion and not be taxable.
Recommendation
That the submission be declined.
Issue: Premiums paid under bookbuild arrangements can be a payment for the right
Submission
(Corporate Taxpayers Group)
As drafted, proposed subsection CD 29B(3) applies to situations when the premium under a bookbuild directly relates to the share (that is, the premium is paid as an additional amount to subscribe for the share). When a person participates in a bookbuild of unexercised rights, the person will generally pay the same amount to subscribe for the share but the “premium” component will generally be attributable to the right itself rather than the share (that is, the right to subscribe for the share). Subsection CD 29B(3) should be amended so that when the premium relates to the right to subscribe for shares, this is also excluded from being a dividend.
Comment
Officials agree that where a premium is paid for the right to purchase a share or to dispose of a share, the premium should not be treated as a dividend. In this case the premium should not be treated as part of the subscription price. This aligns with the policy intent and is consistent with the proposed change for rights issues.
Recommendation
That the submission be accepted.
Issue: Premiums paid in relation to unexercised rights to dispose of shares
Submission
(Russell McVeagh, Corporate Taxpayers Group)
Proposed subsection CD 29B(3) should be expanded to cover premiums paid in relation to unexercised rights to dispose of shares. If premiums paid in relation to unexercised rights to dispose of shares are not excluded from the dividend definition, this could potentially imply that they are considered dividends.
Comment
The bookbuild arrangements officials have come across involve rights to subscribe for shares because bookbuilds are, in nature, equity-raising schemes. However, from a policy perspective, officials agree that when there is an arrangement involving rights to dispose of shares, premiums paid for these under such an arrangement should be excluded from the dividend definition if the company does not give up anything of value and the premium is effectively paid by other shareholders who purchase the rights. Officials also agree that not including such premiums in subsection CD 29B(3) may create uncertainty.
Recommendation
That the submission be accepted.
Issue: Limitation of subsection CD 29B(3) where premium gives rise to available subscribed capital
Submission
(New Zealand Law Society)
In some cases, the excess of the “clearing price” over the “subscription price” may be paid to the company in its own right (rather than to the shareholder who did not subscribe). In that case, it might give rise to available subscribed capital, and should not be excluded from the dividend definition.
Comment
Officials agree that proposed subsection CD 29B(3) should not apply if the premium amount gives rise to available subscribed capital.
Recommendation
That the submission be accepted.
Issue: Retrospective application
Submission
(Corporate Taxpayers Group)
The submitter supports the retrospective nature of the proposed amendments, given that the amendments are intended to remedy particular uncertainty created by what appears to be an unintended broadening of the dividend definition as a result of the rewrite process. However, it is worth emphasising the basis on which the proposed changes are being made retrospective.
Comment
The changes to clarify the dividend definition, so that share splits involving subdivisions, rights issues and premiums paid under bookbuild arrangements do not constitute dividends, apply from the 2005–06 year. This was the commencement date of the rewritten legislation (Income Tax Act 2004) which contained the new (rewritten) dividend definition.
Recommendation
That the submission be noted.
Issue: Change application dates to a fixed date rather than a tax year
Submission
(Ernst & Young)
The amendments should be expressed as applying from 1 April 2005 (for the Income Tax Act 2004 amendments) and from 1 April 2008 (for the Income Tax Act 2007 amendments), rather than for specified tax years. References to “tax years” could cause confusion for shareholders with non-standard balance dates.
Comment
The proposed changes apply to both the Income Tax Act 2007, and its predecessor, the Income Tax Act 2004. The application date of these changes is intended to mirror the application date of both these statutes so that, in effect, the changes apply from the date that the Income Tax Act 2004 (which first contained the rewritten dividend definition) applied from. We do not expect this to cause problems for taxpayers with non-standard balance dates.
Recommendation
That the submission be declined.
1 A rights issue is where a company offers its shareholders rights either to buy new shares at a discount to the market value, or sell existing shares at a premium.
2 Following a rights issue, a bookbuild can take place. A bookbuild involves the rights of non-participating shareholders (who chose not to participate or were not entitled to participate) being offered to other investors who pay a premium for them. The original shareholder is paid all or part of this premium for giving up their rights.