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Chapter 2 – Dividend avoidance and share sales

Home > Publications > 2022 > Dividend integrity and personal services income attribution – a Government discussion document > Chapter 2 – Dividend avoidance and share sales

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 2 – Dividend avoidance and share sales


Tax avoidance involving the sale of shares is often called “dividend stripping.” In broad terms, dividend stripping refers to a situation where a shareholder of a company avoids receiving a taxable dividend by selling their shares for a non-taxable capital sum, often without a change in the economic ownership of the acquired company.[3] However, a taxable dividend can also be prevented from arising by way of a commercial share sale with no purpose of avoidance.

This chapter describes the current law relating to dividend stripping and examines the wider international context.



2.1 Where a shareholder owns a company that distributes dividends, there are two main levels of taxation. The first is the taxation of the profits of the company, and the second is the taxation of the income (dividend) of the shareholder. Different countries deal with these two levels of taxation in different ways, through a classical system, an imputation system, or a full integration system.

2.2 New Zealand’s imputation system allows shareholders to use imputation credits to offset tax paid by the company against their own personal income tax liability when they receive an imputed dividend. If a shareholder’s marginal tax rate is above the company tax rate, then the shareholder pays a top-up tax so that the profits originally generated by the company have tax paid on them equal to the marginal tax rate of the shareholder. The distribution of the dividend is therefore what triggers the requirement to pay the final amount of tax on the profits earned by the company. However, if a dividend is not distributed, the requirement for that top-up tax to be paid is not triggered.

2.3 A dividend is one way a company owner can realise the value generated by the company. Another is for the owner to sell the shares in the company. Under current law, a share sale would not usually trigger any top-up tax, and such transactions are therefore a way for the shareholder to realise the earnings of the company without paying any additional tax.

2.4 The degree to which dividend stripping via share sales is a problem depends on the difference between a shareholder’s marginal tax rate and the company tax rate. The increase in the top personal tax rate to 39% without any change to the company tax rate has made this issue more significant.

2.5 There are some broad categories of solutions available to deal with integrity issues around share sales. At the highest level, having perfect alignment between corporate and personal tax rates would negate the need for any top-up tax to be paid and so there would be no tax to avoid. Alternatively, if dividends were generally exempt, this would also negate the need for any top-up tax to be paid. On the issue of share sales, a capital gains tax would also go some way to solving the problem of dividend stripping as some of the proceeds of a share sale would be taxable. However, the Government has already ruled out introducing a capital gains tax, and so neither of these solutions are within the scope of the current proposals.

Current provisions and relevant cases

2.6 This section outlines the legislative provisions, interpretative publications, and the principles established from case law that have governed how, and contributed to the way in which, Inland Revenue deals with dividend avoidance arrangements involving the sale of shares.

2.7 Dividend stripping arrangements are mostly governed by anti-avoidance legislation. Such legislation can be complex to administer and costly to litigate.

Legislation and interpretations

Anti-avoidance provisions

2.8 Dividend stripping arrangements are mostly governed in statute by the general anti-avoidance provisions in section BG 1 (Tax avoidance) as well as the dividend anti-avoidance provisions in section GB 1 (Arrangements involving dividend stripping).

2.9 The two sections are clearly linked. Subsection BG 1(1) states that a tax avoidance arrangement is void for income tax purposes, while subsection GB 1(1)(b) conditions the application of the dividend anti-avoidance provisions on the disposal of shares being part of a tax avoidance arrangement. This suggests that a transaction is not a dividend stripping arrangement if it is a genuine sale of a company to a third party since that transaction would not be part of a tax avoidance arrangement, even if it did have the effect of transferring value from the company to the vendor of the company.

2.10 If a certain disposal of shares is considered to be a tax avoidance arrangement, the dividend anti-avoidance provisions in section GB 1 apply when some (or all) of the consideration that the person derived from the disposal is in substitution for a dividend. This amount derived in substitution for a dividend is then treated as a dividend of the person and therefore becomes taxable income.

2.11 Subsection GB 1(2) states that an amount is in substitution for a dividend if it is equivalent to, or substitutes for, a dividend that a person either would have (or would in all likelihood have) derived or be expected to derive. In circumstances where the question is whether a person would likely have derived or be expected to derive a dividend, this provision is subjective and can lead to inconsistency in self-assessment and application.

2.12 Between having to show that an amount of consideration is “in substitution for a dividend”, and the requirement to prove that a transaction constitutes a tax avoidance arrangement (that is, there is no genuine commercial rationale for the transaction), it can often be unclear to all parties whether the sale of shares in a given circumstance would be subject to these anti-avoidance provisions.

2.13 The inter-corporate dividend exemption[4] is one of the main mechanisms used to distribute dividends tax free from a target company to its original shareholder. A distribution from the target company to a holding company when both are effectively owned by the same natural person(s) falls under this inter-corporate dividend exemption. The natural person(s) can then extract the dividend through an existing loan arrangement or through a return of equity under the available subscribed capital (ASC) rules.

Interpretation Statement 13/01

2.14 In 2013, Inland Revenue released Interpretation Statement IS 13/01 Tax avoidance and the interpretation of section BG 1 and GA 1 of the Income Tax Act 2007. This publication canvassed in depth the current anti-avoidance provisions and their interpretation, with specific reference to the judgment in Ben Nevis.[5]

2.15 Dividend stripping is not explicitly referred to in IS 13/01, but the Statement provides detailed commentary on the concept of tax avoidance generally. These avoidance principles are entirely applicable to dividend stripping arrangements not within Parliament’s contemplation.

Revenue Alert 18/01

2.16 Following the judgment in Beacham,[6] Inland Revenue issued Revenue Alert RA 18/01 Dividend stripping – some share sales where proceeds are at a high risk of being treated as a dividend for income tax purposes.

2.17 RA 18/01 deals exclusively with cases involving related entities where the economic effect of the transaction does not include a substantial change in ownership. This gives some indication of Inland Revenue’s focus when investigating cases of dividend stripping under section GB 1 or section BG 1.[7] The Alert considers that the greater the similarity between the original shareholder’s owner before and after the sale of shares in the target company, the higher the likelihood that the arrangement would be regarded as tax avoidance. RA 18/01 gives a number of examples pertaining to restructuring involving trusts, shareholder exits, and mergers.

2.18 The Alert focuses on Beacham to illustrate the kinds of transactions under scrutiny, but states that the Commissioner of Inland Revenue’s view is that sections BG 1 and GB 1 can apply in a wider range of circumstances than in that case.[8]

2.19 RA 18/01 notes that Inland Revenue (as of 2018) has begun undertaking investigations into taxpayers who have entered into the sorts of arrangements described in the Alert. Where Inland Revenue considers that some non-taxable transfer of value to a shareholder is in substance a dividend, it will reassess that shareholder on the relevant amount.

Case law

2.20 The following outlines the criteria that, following case law precedent, are used to determine whether a sale of shares is deemed to be a tax avoidance arrangement.

  • Firstly, it should be considered whether the buyer and seller of the shares are associated persons. For example, in the case where the owner of a target company forms another company to purchase shares in the target company, the economic ownership of the target company has not changed, yet the owner will be able to realise some of the value of that company through a capital sum (since they will be associated with the company they formed to purchase the shares). In this case, it is unlikely that there is genuine commercial motivation for the sale.
  • Secondly, it should then be considered whether the target company is cashed-up and whether the buyer can liquidate the company by either:
    • making use of the inter-corporate dividend exemption, or
    • taking a deduction if a loss is made upon the buyer’s future disposal of the shares.

2.21 Dividend stripping arrangements typically tend to involve some of or all the following:

  • Control of the target company is not transferred in the transaction.
  • There is no genuine commercial rationale for the sale of shares.
  • The buyer bears little or no financial risk in the transaction.
  • The arrangement appears to be artificial.

New Zealand context

2.22 During the 1990s, the top personal rate and the corporate rate were both 33% (as well as the trustee rate). This reduced the need for any broader anti-dividend avoidance provisions. Since then, the company tax rate has fallen and the top personal tax rate has increased, so there is now an 11 percentage point difference making the issue more significant.

2.23 Since the first increase in the top personal tax rate to 39% in 2000, New Zealand has seen a notable increase in the imputation credit account (ICA) balances of non-listed companies.[9] This suggests that smaller or fewer dividends are being paid to shareholders.

International context

2.24 The need that a country has for deemed dividend rules varies according to other tax settings within their country. Some countries do have rules for dealing with the types of dividend stripping outlined here. Those countries also typically have other tax settings that limit taxpayers’ ability to engage in types of dividend avoidance, such as capital gains taxes and, to a lesser extent, full integration of company and personal taxes.

2.25 Australia has legislation that details what sorts of payments, loans, and debt forgiveness arrangements are treated as dividends. There are also provisions outlining what is not a dividend for tax purposes. A dividend stripping operation is referred to in the legislation but does not have a precise legal meaning. Australian case law has referred to dividend stripping arrangements having some of the following features or characteristics:[10]

  • A target company with significant undistributed profits.
  • A sale of shares in the target company to another party.
  • A payment of a dividend to that other party out of the target’s undistributed profits that is exempt from income tax.[11]
  • The original shareholders receiving a capital sum for their shares in the target company.
  • The arrangement was carefully planned for the purpose of avoiding tax on the distribution of dividends.

2.26 In 2014, the Australian Tax Office (ATO) published a Taxation Determination on dividend access share arrangements.[12] This addressed circumstances where a company issued a new class of shares on which franked dividends were paid. These shares are often sold to a company owned by the original shareholder. The creation of a new class of shares is a variation on the dividend stripping arrangements referred to in this discussion document. The Taxation Determination ruled that a dividend access share arrangement is either a dividend stripping arrangement or is in the nature of dividend stripping.

2.27 The ATO also released a Taxpayer Alert in 2015 on dividend stripping arrangements.[13] This was with reference to the sale of private company shares to a self-managed superannuation fund, though the principles are equivalent to the concerns of dividend stripping in New Zealand (particularly with regard to the issue of the original shareholders avoiding the top-up tax on the dividend income). This issue arises because income from shares that supports the payment of pensions is exempt income of the self-managed superannuation fund. The Taxpayer Alert suggests that if a taxpayer enters into an arrangement with similar features to those described, the ATO may apply one or a combination of the main anti-avoidance provisions, the non-arm’s length income provision, and any other relevant compliance provisions.

2.28 The Netherlands has specific anti-dividend stripping rules that deny a reduction of withholding tax for dividends or deny a credit for withholding tax paid. To guard against the use of loans in these arrangements, an interest deduction may be denied if a related party grants a loan with respect to distributions of profit, repayments or contributions of capital, or to acquire shares in a company such that the target company becomes a related company after the acquisition.

2.29 Japan’s previous provisions for exempting inter-corporate dividends also created dividend stripping concerns. For example, a target firm may buy back some of its shares from a corporate shareholder, and the shareholder then sells its remaining shares in the target to a third party. Under the previous rules, the cost base of the sold shares did not account for the deemed dividend from the share buyback, meaning the capital gain (and subsequent tax liability) were smaller than they should have been. Recent amendments ensure that a deemed dividend calculated as a result of the share buyback will reduce the cost base of the remaining shares sold in a subsequent sale. This has the effect of increasing the taxable capital gain of the sale to account for the tax-exempt deemed dividend the shareholder received in the share buyback (accounting for any return of capital).


[3] In the international context, dividend stripping may also refer to a number of slightly different situations. In Australia, the issue of dividend stripping is more concerned with the purchasing and selling of shares either side of the ex-dividend date. In some countries, dividend stripping refers to the payment of large dividends that reduce the value of shareholders’ stakes in a company, which in turn contributes to generating a lower capital gain/higher capital loss upon disposal of the shares.  

[4] Section CW 10.  

[5] Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115, [2009] 2 NZLR 289.  

[6] Beacham v Commissioner of Inland Revenue [2014] 26 NZTC 21-111.  

[7] RA 18/01 does, however, note that shares in a cashed-up target company sold for the purpose of avoiding tax on a liquidating distribution should be taxed as a dividend rather than be treated as an ordinary share sale.  

[8] Tax avoidance concerns may be raised, for example, when an arrangement creates ASC in a company despite the shareholder not providing anything in economic reality for the issue of shares by that company.  

[9] At a high level, the ICA balance of a company represents the tax paid by that company minus the imputation credits attached to dividends the company has distributed to shareholders, as well as refunds received. Subpart OB and subpart OP of the Income Tax Act 2007 set out all the possible ICA adjustments.  

[10] These characteristics are referred to in, Lawrence v Commissioner of Taxation [2009] FCAFC 29; (2009) 175 FCR 277; (2009) 2009 ATC 20-096; (2009) 75 ATR 306.  

[11] For example, a dividend paid to a non-resident or if it qualifies for the inter-corporate dividend exemption.  

[12] Australian Taxation Office. (2014). TD 2014/1. Taxation determination.  

[13] Australian Taxation Office. (2015). TA 2015/1. Taxpayer alert.