Company administration costs
Clause 44
Issue: Support for parts of the proposals
Submission
(Corporate Taxpayers Group, KPMG, New Zealand Institute of Chartered Accountants)
The submitters expressed their general support for the proposed amendments that clarify the tax treatment of expenditure on the payment of dividends, the annual subscription paid to list on a recognised stock exchange and annual shareholder meeting costs.
Comment
Officials note the support for the proposed amendments.
Recommendation
That the submission be noted.
Issue: Extend application of proposed section DB 63B to include all fees paid to a recognised stock exchange
Submission
(Corporate Taxpayers Group, Deloitte)
The bill proposes allowing the annual subscription paid to list on a recognised stock exchange to be deductible. Other listing fees, including the initial cost of listing, are not addressed in the bill. These should be deductible as an initial public offering is an ordinary part of a company’s business when it is seeking to access additional equity. It is also a necessary step in growing a business despite the one-off nature of the initial listing fee.
A distinction between initial and annual listing fees is not appropriate from a policy perspective. Denying a deduction for initial listing fees may discourage New Zealand businesses from listing their shares, which goes against the Government’s goal of deepening capital markets to promote increased national savings.
There are also a number of other listing fees such as the cost of an already listed company seeking additional capital or operating a dividend reinvestment programme. It is currently a judgement call whether these costs are capital or revenue. To reduce compliance costs and remove distortions, all listing costs should be deductible.
Comment
Officials disagree with these views. From a policy perspective, initial listing fees are a one-off cost incurred to raise additional equity which creates an enduring benefit for the company. This expenditure is of a capital nature and should not be deductible.
The Government has a broad-base, low-rate tax policy framework, which, in general, aims to tax all forms of income evenly at the lowest rate possible. To avoid taxpayers basing decisions on tax advantages instead of commercial merit, the tax system should not be used to encourage (or discourage) certain activities. Officials recognise the Government’s goal of deepening capital markets but note that the Government has other policy options at its disposal to support this objective that do not conflict with the overall tax policy framework.
There is a significant difference in the nature of the benefit arising from expenditure on initial and annual listing fees respectively. While companies must pay a subscription annually to a recognised stock exchange to remain listed, the initial cost of listing is a one-off expense from which the benefits of additional equity endure for a long period. This forms a justification for allowing a deduction for annual listing fees but denying a deduction for initial listing fees.
Officials’ view is consistent with Inland Revenue’s 2011 draft interpretation statement, Deductibility of company administration costs, which issued draft guidelines on the deductibility of certain company administration costs. It found that expenditure on listing fees was of a capital nature.
Recommendation
That the submission be declined.
Issue: Tax treatment of special shareholder meeting costs
Submission
(Corporate Taxpayers Group, Deloitte, KPMG)
The bill proposes denying a deduction for expenditure on special shareholder meetings. This should not proceed as taxpayers are comfortable with self-assessment at the capital-revenue boundary. There are a number of reasons to hold a special shareholder meeting that would ordinarily be considered revenue – for example, to block a hostile takeover, discuss a major transaction or change the management structure of the company. Expenditure on these meetings will not be deductible under the current proposals. This is not the correct outcome.
Two submitters also proposed making expenditure on special shareholder meetings deductible. (Corporate Taxpayers Group, Deloitte)
Comment
The proposed changes to the tax treatment of special shareholder meeting costs cannot be viewed in isolation. Instead, these must be considered in conjunction with the proposed tax treatment of annual shareholder meeting (AGM) costs. Officials have prioritised a reduction of compliance costs over the accuracy of the tax treatment and attempted to balance the proposed concessionary treatment of AGM costs with a revenue-positive treatment of special shareholder meeting costs.
The bill proposes allowing a deduction for all expenditure on annual shareholder meetings in new section DB 63C(1). This is taxpayer-friendly as a special resolution voted on at an AGM could change the capital structure of the company, and therefore under self-assessment the amount attributed to the capital special resolution of the total AGM cost would not be deductible. However, officials do not think apportioning the meeting cost between the revenue and capital resolutions voted on is desirable from a compliance cost perspective. The taxpayer-friendly treatment of AGM costs necessitates that expenditure on special shareholder meetings be made non-deductible to ensure the overall changes to the tax treatment of shareholder meeting costs are revenue-neutral.
Recommendation
That the submission be declined.
Issue: Clarification of “meeting costs”
Submission
(Corporate Taxpayers Group)
Officials should clarify in the Tax Information Bulletin commentary what exactly constitutes “meeting costs” for the purposes of the legislation.
The submitter suggests that only direct costs of the shareholder meeting, such as venue hire and catering, should be considered as costs of the meeting for the purposes of proposed new section DB 63C.
Comment
Officials expect that the expenditure items considered as “meeting costs” should be clarified by the Commissioner of Inland Revenue in the appropriate fashion, such as an interpretation statement.
Recommendation
That the submission be noted.
Issue: Application dates for the proposed new sections DB 63, DB 63B and DB 63C(1)
Submission
(Corporate Taxpayers Group, Deloitte, New Zealand Institute of Chartered Accountants)
The application date for proposed sections DB 63, DB 63B and DB 63C(1) should be made retrospective. This is because the amendments clarify and confirm existing business practice. This will give taxpayers certainty that earlier tax positions taken will not be challenged.
All submitters suggested that the application date should be made retrospective from the taxpayer’s statute bar period.
One submitter suggested that, at the very least, the retrospective application needs to be from the commencement of the 2013–14 income year given the policy was announced in the May 2013 Budget. (New Zealand Institute of Chartered Accountants)
Comment
The new provisions constitute a policy change rather than merely a confirmation of existing policy settings. They have been introduced to reduce compliance costs and provide certainty of the tax treatment of certain company administration costs that are on, or near, the capital-revenue boundary. Making the application dates prospective is the appropriate approach.
Recommendation
That the submission be declined.