Chapter 2 - Summary
2.1 Income Subject to the Measures
2.2 Branch-Equivalent Basis
2.3 Comparative-Value Basis
2.4 Distributions from Non-Resident Companies and Trusts
2.5 Effective Dates
2.6 Disclosure and Administration
2.1 Income Subject to the Measures
The reforms described in this consultative document apply to foreign income derived by residents of New Zealand from interests in non-resident companies and trusts.
An interest in a non-resident company will be defined in terms of a resident's expected return of dividends from a non-resident company, and will also include such interests held indirectly through one or more non-resident entities. A taxpayer's percentage interest in the income of a non-resident company will be the greater of the taxpayer's percentage entitlement to, or entitlement to acquire rights to, dividends or voting rights in relation to distributions or changes to the company's constitutional rules.
A taxpayer's percentage interest in the income of a non-resident trust is the market value of the property contributed by the taxpayer to the trust, directly or indirectly, as a percentage of the market value of the net assets of the trust. A New Zealand taxpayer will be required to include in assessable income his or her percentage interest in the income of a non-resident company or trust.
Individuals who have interests in non-resident companies, where those interests have a total market value of not more than $10,000 at all times in a year, will not be subject to tax under this regime. Similarly exempt will be individuals who have contributed property with a market value of less than $500 to non-resident trusts.
The amount of foreign income derived by a resident of New Zealand from an interest in a non-resident company or trust will be determined on either a branch-equivalent basis or a comparative-value basis.
Any losses from interests in non-resident companies may be used to offset branch-equivalent or comparative-value income in respect of interests in other non-resident companies in the current year or may be carried forward to offset such income in future years. Any loss from an interest in a non-resident trust may only be carried forward to offset future income from that trust. Losses may not be used to offset other assessable income.
2.2 Branch-Equivalent Basis
The branch-equivalent basis for reporting income may be used if the taxpayer has sufficient information about the income of the non-resident entity and elects to adopt this basis.
New Zealand residents who elect to report income on a branch-equivalent basis will include in assessable income their percentage interest in the income of any non-resident company or trust in which they have a direct or indirect interest. For this purpose, the income of a non-resident company or trust must be computed in accordance with New Zealand tax law. In addition, dividends received by a non-resident company from another non-resident company whose income is reported on a comparative-value basis must also be included in the recipient company's income. Distributions of income received by a resident may be deducted, subject to certain limitations, in calculating branch-equivalent income. A taxpayer's percentage interest in the income of a non-resident trust will not include any amount which has become indefeasibly vested in a beneficiary.
New Zealand residents who include in assessable income for any year their percentage interest in the income of a non-resident company or trust computed on a branch-equivalent basis will be entitled to a credit for their percentage interest in the foreign taxes paid by the non-resident company or trust in that year.
2.3 Comparative-Value Basis
Under the comparative-value basis, a New Zealand taxpayer must include in his or her assessable income each year any change in the market value of a direct or indirect interest in a non-resident company or trust. The market value of an interest in a non-resident company must be determined by reference to the trading price of the interest if the price is available and reliable. If not, the market value must be determined in accordance with appropriate valuation methods based on shareholders' funds or net (after-tax) earnings. In certain circumstances, taxpayers will be required to compute the change in value of an interest by reference to an imputed rate of return of five percent in excess of the rate on five-year Government stock.
Where the proceeds of disposition or the market value of an interest in a non-resident company exceed the last reported value of the interest by more than 30 percent and the interest has not been valued by reference to trading prices, a post facto adjustment will be made to the taxpayer's tax liability for the preceding years to recoup any tax-deferral benefits resulting from the undervaluation, unless the taxpayer can demonstrate that earlier market values were accurate.
The market value of an interest in a non-resident trust will be the portion of the market value of the net assets of the trust represented by the settlor's percentage interest in the trust. If, however, the market value of the assets of the trust cannot be determined, the imputed return method must be used to value the interest.
2.4 Distributions from Non-Resident Companies and Trusts
Foreign portfolio dividends received by resident companies (ie dividends from a non-resident company in which a resident has less than 10 percent of the paid-up share capital) will be included in assessable income. A credit will be allowed for any foreign withholding taxes. Other dividends received by resident companies from non-resident companies will continue to be exempt from company tax. However, recipient companies will be required to collect a withholding payment on behalf of their shareholders. The withholding payment will be creditable to their resident shareholders (and refundable to tax-exempt and non-resident shareholders) when dividends are paid by the resident company. Similarly, any New Zealand tax paid by resident companies under the branch-equivalent basis will be creditable to resident shareholders under the imputation scheme outlined in the accompanying consultative document.
Dividends received by individuals resident in New Zealand will remain assessable, with a credit allowed for any foreign withholding tax.
Distributions received by resident beneficiaries from non-resident trusts will be included in assessable income except to the extent that the distribution is made out of the corpus of the trust. A credit will be allowed for any foreign withholding taxes on the distributions.
2.5 Effective Dates
The various aspects of the reform proposals set out in this consultative document will come into effect as follows:
- for taxpayers electing to use the branch-equivalent basis, from 1 April 1988. Where a non-resident entity's accounting year straddles 1 April 1988, only the proportion of its income for the year attributable to the period after 1 April 1988 will be subject to tax under these measures;
- for taxpayers using the comparative-value basis, from 1 April 1988. Such taxpayers will be required to establish the market value on 1 April 1988 of their interest in non-resident companies and trusts. Thus, only increases and decreases in market value occurring after 1 April 1988 will be taken into account under these measures;
- for portfolio dividends received from non-resident companies, such dividends declared after the time of the Minister of Finance's statement on 17 December 1987. A dividend will be deemed to be received when it is declared by the payer company; and
- for distributions by non-resident trusts to resident beneficiaries, such distributions that become indefeasibly vested in a resident beneficiary after the time of the Minister of Finance's statement on 17 December 1987.
2.6 Disclosure and Administration
Taxpayers will be required to disclose their interests in non-resident companies and trusts and to provide all information necessary to compute foreign income in accordance with these measures. Taxpayers with interests in non-resident companies or trusts will be required to file a separate schedule for each such company or trust with their annual return. Schedules will deal with the calculation of the income from such interests. Penalties will apply for failure to disclose the necessary information.
A special unit of the Inland Revenue Department will be established to ensure the efficient and fair administration of the measures proposed in this document.