Hon Peter Dunne
Minister of Revenue
Government to clarify taxation of profit distribution plans
The Government will clarify the law to ensure that bonus issues of shares distributed under profit distribution plans (PDPs) are taxed in the same way as shares issued under other dividend reinvestment plans, Finance Minister Bill English and Revenue Minister Peter Dunne announced today.
"We are concerned about a possible lack of consistency in the tax treatment of the two types of share issues," Mr English and Mr Dunne said.
"Under standard dividend reinvestment plans, shareholders choose between receiving cash dividends or shares. Both are taxed as dividends and subject to the imputation system. These rules ensure that imputation credits cannot be streamed to particular shareholders and that the personal tax rate of the shareholder applies to the dividend income.
"PDPs, on the other hand, make use of a different form of transaction to provide shareholders with the option of receiving shares or cash. Under PDPs, companies declaring a dividend make a bonus issue of shares to all shareholders, which can be immediately sold back to the company for cash. This form of reinvestment plan is not explicitly covered by the tax rules.
"As a result, when the shareholder chooses to retain shares, the receipt of the shares may not be taxable as a dividend. For certain taxpayers, this would provide a tax advantage relative to the treatment of standard dividend reinvestment plans.
"We can see no reason why one form of dividend reinvestment plan should be tax-advantaged over the other. There appears to be uncertainty on the treatment of PDPs in the business community as well, since a number of companies have inquired about their treatment.
"Later this year, the Government intends to introduce legislation, to apply prospectively, confirming that distributions to shareholders under PDPs are indeed taxable.
"Before that happens, however, we will consult with affected taxpayers to ensure that the law changes work effectively and fairly. To that end, we plan to release, over the next few weeks, a consultative paper that canvasses views on the more technical aspects of the law change.
"Until resulting legislation is enacted, the taxation of dividend reinvestment plans will continue to be governed by existing tax rules, including the anti-avoidance rules," they said.
Mark Stewart | Press Secretary | Office of Hon Peter Dunne
Cell +64 21 243 6985 |
Technical Tax Detail Contact:
Ainslie Fenwick +64 29 890 2452