Dividend integrity and personal services income attribution
A Government discussion document
Hon Grant Robertson
Minister of Finance
Hon David Parker
Minister of Revenue
March 2022
Chapter 5 – Policy options
Summary
There is a strong case for amending the TAA to deal specifically with record keeping requirements in relation to ASC and ACDAs, and maintaining tracking accounts for ASC and ACDA, similar to those that are maintained for imputation credits. Such accounts would prompt companies to keep contemporaneous records, and this would significantly improve the reliability of the figures. Contemporaneous accounts would also create an opportunity for the Commissioner to make a contemporaneous challenge to an ASC or ACDA increase, rather than having to wait until a distribution occurs to do so.
There is a question as to whether taxpayers should be required to submit these tracking accounts to Inland Revenue each year as part of the return filing process (similar to the IR4J process for imputation credit accounts), or if taxpayers should only be required to record the information and keep adequate supporting records to evidence that they have calculated the dividend amount correctly. In the event of an audit, Inland Revenue would determine the company’s ASC and ACDA if the taxpayer cannot provide reliable evidence to support its calculations.
Record keeping
5.1 Dealing first with record keeping, the requirement would be for a company to keep sufficient records to enable the ready ascertainment by the Commissioner of the company’s ASC and ACDA. These records would have to be maintained for the life of the company, rather than the usual seven-year period.
5.2 There is a question as to whether compliance with these requirements would be mandatory. Many companies have for their entire existence no more than nominal ASC. For companies which are wholly-owned subsidiaries, ASC is irrelevant (though ACDA is not). Accordingly, compliance with this record keeping requirement could be optional, with companies electing not to comply being entitled to no credit to their ASC or ACDAs for the relevant years.
Memorandum accounts
5.3 Like an imputation credit account (ICA) the account would be a running total, with each year’s closing balance forming the opening balance for the next. As noted above, there are two possible approaches in relation to tracking accounts for ASC and ACDA. The first is to require taxpayers to submit these accounts to Inland Revenue on an annual basis. If these accounts are not prepared for a year on a timely basis, the company would then have no ASC or ACDA for that year. The second is to require taxpayers to keep and maintain these accounts if they do not wish to have their ASC or ACDA be deemed to be zero, but without requiring taxpayers to submit these accounts to Inland Revenue. Under each option the company would still need to maintain sufficient records to evidence the amounts entered in the ASC and ACDA memorandum accounts. It would not be sufficient simply to maintain the memorandum account without retaining the records substantiating the account entries.
Option one: Accounts are reported to Inland Revenue annually
5.4 One benefit of requiring taxpayers to maintain tracking accounts and submit them to Inland Revenue annually is that this would serve as a prompt to taxpayers to maintain records. It would also provide Inland Revenue with information on a contemporaneous basis regarding movements in the account and allow it to investigate those movements.
5.5 Under this option, failure to submit a return of the tracking accounts by the due date would mean a taxpayer could not later increase the account balance by any amount for that period, except with the Commissioner’s approval and if the required contemporaneous records were able to be provided. A hard time limit (for example, five years after the due date) might also be appropriate.
5.6 A further question is whether the return would be able to be re-opened by the Commissioner. The purpose of the return would be to assist taxpayer compliance. Its purpose would not be to place an onus on the Commissioner to audit the return. Accordingly, the Government does not propose placing a time limit on the Commissioner’s ability to challenge a return in relation to the ACDA and ASC memorandum accounts. As a practical matter, the maintenance of contemporaneous records would make challenge at the time of a distribution relatively unlikely. Challenges would instead be made to entries in the accounts, within a relatively short time of those entries being made. The current time limit would continue to apply to assessments of shareholders in relation to distributions from the company, which would effectively mean the time bar applying from the point in time when the determination of a company’s ASC or ACDA amounts became relevant for tax obligations.
5.7 As with the proposed record keeping requirement, compliance with a requirement to maintain tracking accounts could be optional, on the basis that companies that do not choose to maintain accounts would then have no ASC or ACDA.
Option two: Accounts required to be kept and maintained but not required to be reported to Inland Revenue annually
5.8 Under this option, rather than requiring tracking accounts for ASC and ACDA to be submitted to Inland Revenue annually, taxpayers would only be required to provide these accounts (along with supporting records) to Inland Revenue when this information is specifically requested, such as in the event of an audit. Similar to option one and the proposed record keeping requirement, maintenance of these tracking accounts could be optional (again, on the basis that companies that do not choose to maintain accounts would then have no ASC or ACDA).
5.9 The main benefit of not requiring tracking accounts to be submitted each year, but instead only requiring them to be kept by taxpayers would be lower compliance and administration costs in respect of amounts that do not affect taxable income for that particular year. The disadvantages of this from Inland Revenue’s perspective would be reduced visibility of amounts being claimed by taxpayers as ASC and ACDA, and potentially reduced incentives for businesses to maintain accounts (although the potential loss of ASC and ACDA might provide sufficient incentive on its own).
5.10 Submissions are invited on whether tracking accounts should be required to be reported to Inland Revenue annually, or whether it would be sufficient to just require these accounts to be kept and maintained if a company does not want to have deemed ASC and ACDA of zero.
Transitional
5.11 The transitional issue here is considerable. Many, perhaps most, existing companies have not maintained contemporaneous ASC or ACDAs, relying instead on calculating the figure on a retrospective basis if it ever becomes necessary to do so. Requiring all existing companies to undertake a retrospective calculation would be onerous, and in many cases ultimately pointless, as the company will be wound up when wholly owned by another company, or with no amount returned to the shareholders.
5.12 Accordingly, the Government proposes that any change to the rules would only take effect for transactions occurring after the law is enacted. To the extent a company’s ASC and ACDA figures rely on transactions occurring before that date, the current law would continue to apply. A company will have the onus of proof in establishing the amount of ASC and ACDA (as is the usual case for tax matters), but this burden can be satisfied at the time the ASC and ACDA accounts become relevant (that is, when shares are repurchased or liquidating distributions are made to shareholders).
5.13 Over time a greater and greater percentage of the total amount of ASC and ACDA will be under the new rules. This will make the calculation of dividends on liquidation of a company, for instance, much easier to determine.
5.14 Thought will need to be given as to the order in which credits to the ASC account can be used. For example, suppose a company formed in 1990, which issues $1 million of shares after the introduction of tracking accounts. The company then returns $750,000 to its shareholders in a share repurchase transaction. Should this first be debited against ASC arising before the tracking account was set up, with any excess recognised in the new account, or should it first be debited against the amount in the account (which in this case would mean the historic ASC would remain untouched, but the ASC subject to the new rules would be only $250,000)?
5.15 In favour of debiting the ASC tracking account is the fact that it will be well documented. On the other hand, debiting historic ASC would support the gradual elimination of such ASC.
Questions for submitters
Submissions are sought on all aspects of this proposal, but in particular on:
- Whether the proposed transitional rule is appropriate.
- Whether the Commissioner should be able to reopen a return and on what basis.
- Whether the proposal strikes an appropriate balance between compliance costs and tax integrity.
- Whether the ASC and ACDA memorandum accounts should be reported in annual returns.