A special report by the Policy Advice Division of Inland Revenue
19 June 2001
Dairy Industry Restructuring Bill
The Dairy Industry Restructuring Bill, which provides for the regulatory and structural reforms of the dairy industry, was introduced into Parliament today. The bill facilitates reform by authorising the amalgamation of New Zealand's two largest dairy co-operatives and the subsequent conversion of the New Zealand Dairy Board into a company.
The bill contains a number of tax provisions relating to the restructuring of the dairy industry. Most of the changes take effect from the date of the amalgamation. The exceptions are certain provisions relating to the conversion of the Dairy Board, which apply from the date of conversion, and those relating to the New Zealand Research Institute and consequential tax amendments, which apply from the date of royal assent.
Shares issued on amalgamation
The issue of shares to dairy farmers in respect of the shares held by them in the amalgamating co-operative dairy companies will not be treated as a dividend for income tax purposes, or as a dutiable gift. The provision ensures that no tax implications arise on the issue of Global Dairy Company (GDC) shares to dairy farmers upon amalgamation.
Available subscribed capital of GDC
The bill provides for the transfer of the available subscribed capital (ASC) of the New Zealand Dairy Board to the GDC upon the amalgamation. Furthermore, the notional ASC of $140,000,000 that the Dairy Board will receive each year until 2006 under the Dairy Board Act 1961 will now be received by the GDC. It will be able to nominate the proportions of ASC received between the classes of shares issued.
Net tax losses and imputation tax credits of the amalgamating co-operatives
The GDC will be allowed to use the net tax losses and imputation tax credit balances of the amalgamating dairy co-operatives, their subsidiaries and their consolidated tax groups as at the date of the amalgamation. This will be achieved by treating shares, or options over shares, held by any person after the amalgamation to be held by that person at all times before the amalgamation, thereby overriding the continuity rules in the Income Tax Act 1994. Without these provisions, these tax losses and imputation tax credits balances may have been forfeited on the amalgamation.
Conversion of Dairy Board into a company
The bill provides for the conversion of the New Zealand Dairy Board into a company, under the Companies Act 1993, 12 months after the Dairy Industry Restructuring Act 2001 receives royal assent. At present the Dairy Board is a corporate body established under the Dairy Board Act 1961.
The tax provisions in the bill provide that the Dairy Board will cease to be a statutory producer board upon conversion. Furthermore, the converted Dairy Board will be entitled to claim a tax deduction for the unexpired portion of any accrual expenditure of the Dairy Board not claimed by the Board before it converts. Until the Dairy Board converts into a company, the voting interest and market interest values in the Dairy Board will continue to be determined by provisions in section 15ZE of the Dairy Board Act (reference to qualifying milksolids). The bill provides that the Dairy Board and the company to be registered will be the same person. This provision will apply for tax purposes.
Livestock Improvement Corporation
A number of tax provisions in the bill relate to the establishment of the Livestock Improvement Corporation (LIC) as a co-operative company owned by the purchasers of its products and services. The bill requires the LIC to prepare a restructuring plan for the approval of the Minister of Agriculture. The restructuring plan will contain a share allocation plan for the LIC, a constitution that complies with the requirements of the bill, a proposed application for registration under the Co-operative Companies Act and a restructuring date.
The tax provisions provide that the issue of shares by the LIC under the restructuring plan to the users of the LIC's products and services will not be treated as a dividend for income tax purposes, or as a dutiable gift. The provision will ensure that no tax implications arise on the issue of LIC shares as part of the restructuring plan.
When the restructuring plan is implemented, the shares in the LIC on issue immediately before the restructuring day will be cancelled and new shares issued in accordance with the share allocation plan. The bill provides that the ASC of the new shares issued will be equal to the ASC of the shares cancelled. This provision will ensure that the ASC of the shares on issue is not forfeited upon the cancellation of the shares.
The LIC is currently exempt from tax under section CB (4)(1)(g) of the Income Tax Act 1994 as a dairy cattle herd improvement association. The bill provides that if the LIC loses its tax-exempt status as a result of alterations to its constitution:
- It will become taxable from the beginning of the income year in which the alteration to the constitution takes effect. This will avoid the need for the LIC to prepare two sets of financial accounts for tax purposes.
- There is a deemed sale and re-acquisition of the assets and rights of the LIC at market value at the beginning of that income year. This will allow the LIC a market value for its assets and rights for tax purposes, such as for depreciation purposes.
- The alteration of its constitution will not affect the tax-exempt status of the LIC in prior income years. However, this provision does not apply if the Dairy Board retains any interest in the LIC (unless it receives shares under the restructuring plan) so that any funds of the LIC will be used or will be available for use for the private pecuniary profit of the Board.
New Zealand Dairy Research Institute
The bill provides for the dissolution of the charitable trust known as the New Zealand Dairy Research Institute (DRI) and for the vesting of its assets and liabilities in the current trustee, which is a subsidiary of the Dairy Board. In relation to tax, the bill provides that:
- The company (the current trustee) will acquire the assets and liabilities of the DRI on amalgamation for their market values. This will create a market value for its assets and liabilities for tax purposes such as for depreciation purposes.
- For the purposes of the Inland Revenue Acts, the company and the charitable trust are deemed to be same person.
- The removal of the trust's charitable purposes will not affect its tax-exempt status before the amalgamation date.
- For the avoidance of doubt, the vesting of the assets and liabilities of the trust in the company will not be a dutiable gift.
Consequential amendments to the Income Tax Act 1994
The bill also makes a number of minor consequential amendments to the Income Tax Act 1994.