SHAREHOLDER ISSUES Part II. Prepared & Presented by nsatax Limited

Transcription

1 SHAREHOLDER ISSUES Part II Prepared & Presented by nsatax Limited

2 Disclaimer This webinar is of a general nature only. Please obtain specific advice on client situations as minor changes in facts may result in significantly different outcomes. This webinar does not purport to cover all aspects of tax law relevant to the topics covered. Caveats All references to Income Tax Act 2007 unless stated otherwise Comments relate to ordinary companies Not necessarily applicable to LTCs and QCs as these have special rules Dividends Specific Issues 1

3 Dividend Income: Basics What dividends give rise to taxable income? Cash dividends Non-cash dividends Deemed dividends Taxable bonus issues Certain share buybacks/returns of capital Focus on specific issues like deemed dividends & share buy backs Dividends to Non-Residents If shareholder non-resident, dividend will be non-resident passive income NRWT generally at 15% From 1 Feb 2010 if dividend fully imputed and shareholder has 10% interest, NRWT at 0% Also 0% if fully imputed and DTA limits tax rate to < 15% Refer srf 11B Dividends to Non-Residents If not fully imputed, NRWT at 30% unless NZ tax on dividend limited under a DTA Most DTA s limit NZ tax to 15% on dividends paid to residents of the other contracting state Australia & US DTA s limit tax to 5% if to a company with 10% interest Fully imputed dividends to <10% shareholders can have supplementary dividends under the Foreign Investor Tax Credit regime 2

4 Taxable Bonus Issues Means bonus issue in lieu of a dividend (where shareholder can elect to receive cash or shares) or a bonus issue the company elects to be a dividend under scd 8 Notice required to CIR Treated like cash dividends attach ICs & RWT Forms part of available subscribed capital ( ASC ) Why use a TBI? Often done as part of a share sale to utilise ICs pre continuity breach to avoid losing them but without depleting cash reserves Need to consider top up tax cost to shareholder Converts fully imputed retained earnings to paid up capital or Available Subscribed Capital ( ASC ) Contrast with non-taxable bonus issues which are tax free to shareholders but do not count towards ASC Deemed Dividends 3

5 Deemed Dividends Deemed dividend is a dividend which is deemed to arise for tax purposes Most common is the use of company property (including a loan) for less than market value Also includes a company Disposing of property to a shareholder for less than market value Acquiring property for more than market value Property made available to the company at greater than market value Deemed Dividends Deemed dividends generally identified as a result of an IRD audit so no imputation credits attached Company assessed for RWT unless exemption applies Most common situation is an interest free loan to a shareholder or an associated person Subject to exemptions/exclusions see later Watch benchmark dividend rules where deemed dividend arises Dividends & Shareholder Employees If non-cash benefit provided to a shareholder who is also an employee, deemed to be a fringe benefit But, if the benefit is an unclassified benefit, can elect to treat as a dividend (scx 17) Notice requirements to CIR Doesn t apply to vehicle or low interest loans Could apply to private expenditure or transfers of property for less than MV 4

6 Dividend Exclusions/Exemptions Exemptions & Exclusions Two main exceptions to the rule Downstream dividend exclusion (scd 27) Wholly owned group company exemption (scw 10) Exclusion = not a dividend Exemption = dividend but exempt from tax Focus on interest free loans Downstream Dividend Exclusion Rule 5

7 Dividend Exclusion Rule Exclusion in scd 27 for downstream transfers of value Applies to parent company/shareholder loans to subsidiaries Generally does not apply to upstream loans from subsidiary to parent/shareholder If exclusion applies, means no dividend arises (contrast with exemption) Multiple criteria + $10,000 de minimis Dividend Exclusion Rule Downstream Loan Parent Ltd 80% Upstream Loan Subsidiary Ltd 20% Mr X Dividend Exclusion Rule scd 27 exclusion applies to loan from Parent Ltd to Subsidiary Ltd so no need to charge interest Loan from Subsidiary Ltd is upstream so exclusion does not apply Need to charge interest on that loan Interest assessable/deductible Could group loss offset so no tax effect 6

8 Dividend Exclusion Rule Subsidiary does not have to be 100% owned Not limited to parent/subsidiaries Can apply where sister company of parent has provided loan and sister company could have made loan to parent without a taxable dividend arising Dividend Exclusion Australia NZ Parent Ltd 100% 100% 100% Oz Sister Ltd Subsidiary Ltd Loan Loan NZ Sister Ltd Dividend Exclusion Loan from Parent Ltd to Subsidiary Ltd covered by exemption Loan from Oz Sister Ltd also covered as interest free loan from Oz Sister Ltd to Parent Ltd would not give rise to NZ dividend issues as both non-resident Loan from NZ Sister Ltd not covered by exclusion because if loan was from NZ Sister Ltd to Parent Ltd would have been nonresident passive income 7

9 Wholly Owned Group Exemption Exempt Dividends scw 10 exempts dividends between members of wholly owned group Requires 100% common shareholding Neither company can be a foreign company Recipient cannot have been a Qualifying Company at any time prior to deriving the dividend this is very important so need to check this Exempt Dividends Exemption does not apply to debt release dividends so forgiveness of debt not exempt If exempt under scw 10, still a dividend but exempt income of recipient Still attach imputation credits Specific timing rules re property made available Dividends calculated quarterly & arise 6 months after balance date, or earlier if notice given 8

10 Wholly Owned Group Exemption Coy A & Coy B form wholly owned group Peter Jones 100% Coy A Interest Free Loan Coy B Common Issues Coy Coy Case 1: A B LCVI Trust % Mum - 1 0% Dad - 1 0% Total shares on issue Lowest Common Voting Interest 98% Case 1: Not a wholly owned group as only 98% common voting interests Result: Charge interest on intercoy loans Common Issues Coy Coy Case 2: A B LCVI Trust % Individual % Total shares on issue 100 1,000 Lowest Common Voting Interest 99.1% Case 2: Not a wholly owned group as only 99.1% common voting interests Result: Charge interest on intercoy loans 9

11 Returns of Share Capital Returns of Share Capital Dividend unless a return of ASC under share buy back rules ASC includes: Amounts paid up in cash on issue of shares Taxable bonus issues and bonus issue in lieu Can be used to return capital to shareholders tax free without liquidating company $100 ASC = $100 tax free Share Buy Backs Results in cancellation of shares Pro-rata offer = offer to all shareholders Where pro-rata offer, company must suffer 10% or 15% capital reduction Non-pro rata offer = offer to selected shareholders Where non pro rata offer, shareholder must suffer a 10 or 15% interest reduction 10

12 Share Buy Backs Pro rata: capital reduction test requires the amount paid on repurchase to exceed 10%- 15% of market value of all participating shares in the company Non pro rata: interest reduction test requires the shareholder to suffer a 10%-15% reduction in voting interest (or market value interest) in the company If buy back is >10% but <15%, must satisfy IRD that not in lieu of dividend (notice req d) In Lieu of Dividend Commissioner takes into account: The nature and amount of dividends paid by the company prior and subsequent to the buy back; and The issue of shares in the company prior and subsequent to the buy back; and The expressed purpose or purposes of the buy back; and Any other relevant factor Share Buy Backs Remember, only the ASC (paid up capital) can be returned tax free Can t distribute capital gains via share buy back Excess is a taxable dividend Be careful that you do not substitute a tax free capital gain for a dividend ASC reduces with each buyback. Last shareholder may have no ASC on liquidation 11

13 Overdrawn Current Accounts Overdrawn Current Accounts Generally need to charge interest to avoid deemed dividend or FBT Employee = FBT Shareholder non-employee = dividend Employee if received or entitled to receive in the past present or future a PAYE income payment i.e. salary or wages, extra pay or schedular payment Overdrawn Current Accounts Dividend = interest calculated at FBT prescribed rates Salary, interest & dividends treated as being paid at beginning of income year in certain circumstances for FBT/dividend purposes To qualify for retrospective crediting salary, interest or dividends must be paid without deduction under the PAYE, RWT or NRWT rules 12

14 Overdrawn Current Accounts Applies to non-paye deduction salaries and interest/dividends paid to holder of COE or members of a group of companies All other salaries, interest or dividends will have tax deductions Common practice to credit dividends or salary at year end to clear O/D current accounts No retrospective crediting available for dividends fully imputed at 28% if RWT of 5% required to be deducted Overdrawn Current Accounts Common practice to backdate dividends to clear overdrawn current accounts No justification for this practice. At best a smoke screen by not having to show overdrawn current account at year end Even if dividend credited 31 March, still have dividend/fbt on overdrawn balance for the rest of the year Issues with RWT now Employee Share Schemes 13

15 Employee Share Schemes Income from employment includes benefit under employee share purchase agreement (sce 1) Taxable benefit = value of shares when acquired less price paid Taxable in year shares acquired (exercise date for options) or rights disposed Employee Share Schemes Special rules for disposal of rights & timing of income/benefit If rights disposed of to non associate, benefit = consideration received, and income derived when rights disposed of If disposed of to associate, benefit = value of shares on date associate acquires shares less price paid. Income derived when associate acquires shares Employee Share Schemes Special rules dealing with death of the employee Special rules regarding value of benefit where certain restrictions imposed Special rules relating to relationship property transfers 14

16 Employee Share Scheme Loans No FBT arises on employee share loan (scx 35). Employee share loan: Loan only used for purpose of share/option purchase Employee beneficially owns shares/options throughout term of loan else must be repaid Dividend paying policy is in place Disqualified if QC or E er/e ee associated Must pay for shares Employee Share Scheme Loans No FBT arises on loan under a share purchase scheme (sdc 12) Restrictive schemes - open to all employees, maximum cost $2,340 over 3 years, minimum employment period, + other requirements Limited application in practice Employee Share Schemes Alternative schemes: Outright share purchase, with interest free loan Call option granted allows Co to buy back on death, resignation, etc Put option granted, protects employee from loss Watch timing of pay out as may trigger provisional tax and UOMI Common area of non compliance. IRD regularly target easy pickings 15

17 Vehicle Options Vehicle Options Multiple options for vehicle ownership: finance lease, operating lease, hire purchase, outright acquisition Differing tax outcomes/options Will cover details in upcoming webinar Focus on distinction between operating and finance leases, and overview of ownership options Finance v Operating Lease Critical to distinguish between operating leases and finance leases. Tax treatment very different Finance lease = acquisition with loan back Acquisition = depreciation claimed Loan means lease payments = principal & interest Operating lease is a lease entered into on or after 20 May 1999 and which is not a finance lease 16

18 Finance v Operating Lease Finance lease definition sya 1 In relation to a vehicle, a finance lease one which when entered into Involves the transfer of ownership of the vehicle or provides a option to buy at less than market value, and Term of the lease is more than 75% of its useful life (45 months max for vehicle) There are other requirements but transfer of ownership and term are the main ones Finance v Operating Lease Options include: a) Employer/company ownership: full income tax deductions/gst inputs but FBT b) Per above but shareholder employee is charged for use of the vehicle (equivalent to value of the fringe benefit): full income tax deductions/gst inputs, no FBT. Recharge to employee = income to company and nondeductible to employee Finance v Operating Lease Options include: a) Personal ownership/lease with tax free reimbursement of actual expenses for business use (based on log book percentage): No FBT, deductibility of business use percentage. Great if business use is high, can be GST leakage b) Reimbursement at IRD mileage rates: generally where low business use. GST leakage 17

19 Finance v Operating Lease We prefer tax free reimbursement where private use low. Less tax leakage Change to law in 2008 now allows depreciation to be reimbursed tax free so impediment to owning vehicles removed FBT option (with or without shareholderemployee charge) preferred where private use high GST leakage where vehicle owned or finance lease Insurances Insurance All types of insurances: health & medical, trauma, TPD, life cover, income protection Various types of policies under each heading e.g. income protection includes agreed value, indemnity value, mixed policies Tax deductible to company if provided as part of employment package but generally subject to FBT (bar income protection) Tax status of premiums and pay-outs complex and depends on policy 18

20 Key Man Insurance Focus here on key man insurance Key man insurance typically in place to cover: a) Loss of income as a result of loss of key employee (CEO, Director, Partner) b) Repayment of business debt c) Cost of purchasing interests of deceased or exiting partner/shareholder Key Man Insurance If policy to cover loss of company income, and Benefit of policy payable to company, premiums are deductible. No FBT or dividend as no benefit to employee. Pay out taxable to company Benefit of policy payable to employee, premiums are deductible. No FBT or dividend as proceeds taxable to employee Same as any other loss of income policy Key Man Insurance If policy to cover repayment of business debt: Premiums will not be deductible as they will be considered a capital expense. Not a cost of borrowing money. Cost of taking out policy which is an asset Any pay out will not be taxable. Will be used to repay business debt. Irrelevant if pay out more than business debt No FBT benefit to company only 19

21 Key Man Insurance If policy to cover shareholders purchase of interest/shares in company, premiums deductible to employer but subject to FBT or dividend, else charge to shareholder employee current account Questions 20