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Inland Revenue

Tax Policy

Chapter 9 – Summary and Conclusion

9.1 Summary of Recommendations

BE Method
CV Method
Foreign Fund Regime
Other Reforms

9.2 Conclusion

9.1 Summary of Recommendations

9.1.1 In summary, the Committee's recommendations are that:

BE Method

a the BE regime apply only where New Zealand residents have control of a company;

b control be defined as the ownership by 5 or fewer residents of 50 percent or more of the shares (or votes, rights to dividends or distributions on wind up) of a company, subject to:

i a constructive ownership test to include interests held through associated persons, nominees and other controlled companies;

ii a de facto control provision to include within the regime persons who have the power to require a distribution or the wind-up of a non-resident company; and

iii an anti-avoidance provision to deter arrangements which have the effect of defeating the intent and application of the control test; and

c resident shareholders who directly or indirectly hold a 10 percent or greater interest in a controlled company and residents who are deemed to have control by virtue of the de facto control and anti-avoidance provisions be subject to the BE regime, but other resident shareholders of controlled companies be exempt from it;

d residents be exempt from the BE regime in respect of interests in companies which are:

i resident for tax purposes in certain listed countries with comprehensive international tax regimes including CFC regimes (i.e.the United States, the United Kingdom, West Germany, Canada, France and Japan) or Australia; and

ii do not benefit from specified significant tax preferences in those countries such as accelerated capital write-offs or the exemption of certain foreign-source income. Where a company did utilise a specified preference, it would be required to adjust its taxable income, determined according to the country of residence tax rules, for the effect of the tax preference(s). If its foreign tax paid as a ratio of its adjusted taxable income equals or exceeds the New Zealand company tax rate, the BE regime would not apply;

e non-minor shareholders (and other shareholders deemed to have control) in a controlled company who have interests which are held indirectly through other foreign companies be subject to the regime unless the controlled company satisfies the exemption outlined in recommendation (d);

CV Method

f the CV regime apply only to interests in foreign investment funds, as outlined in recommendation g;

Foreign Fund Regime

g in addition to the BE regime, there be a foreign investment fund regime to apply to interests in entities which:

i derive their income or value primarily or substantially from holding or trading portfolio investments in shares, investments in debt instruments, real property, commodities, etc; and

ii the effect of the residence of the entity for tax purposes and its distribution policy is to reduce the tax payable on the income of the entity below what it would be had the income been taxed in New Zealand as if it were derived by the investor;

h the taxable income derived by a resident from an interest in a foreign investment fund be calculated as the increase in the market value of the interest over the income year, plus any distributions receivable;

i where an interest in a non-resident entity falls within both the BE and foreign investment fund regimes, the BE regime apply;


j a settlor be widely defined as any person who directly or indirectly provides money, goods, services or other benefits to a trust for inadequate consideration;

k a trust be treated as a resident of New Zealand for income tax purposes if the settlor of the trust is a New Zealand resident;

l the trustee of a resident trust be primarily liable for tax on trust income but, in the event of the trustee defaulting on such a liability, the settlor be liable as agent of the trustee;

m distributions of trust income (i.e. income which has been taxed in the hands of the trustee or the resident settlor) to a beneficiary from a resident trust be exempt from tax in the beneficiary's hands;

n all distributions of income to a beneficiary from a non-resident trust be taxable in the hands of the beneficiary, but the beneficiary be allowed a credit for any foreign or New Zealand tax paid by the trustee;

o distributions of capital profits or the corpus to a resident beneficiary from a non-resident trust be exempt from tax in the hands of the beneficiary;


p taxpayers be exempt from the BE regime for a two year period (i.e. until 1 April 1990) in respect of interests acquired on or before 17 December 1987 in companies which are not resident in a transitional list of specified low tax jurisdictions;

q taxpayers be exempt from the BE regime for a one year period (i.e. until 1 April 1989) with respect to interests which were acquired after 17 December 1987 in companies which are resident in the list of countries specified in recommendation (d)(i);

r distributions of income made on or before 31 March 1989 from settlements by residents, on non-resident trustees, in existence on 17 December 1987 be subject to a final tax levied at a rate of 10 percent, provided that either the trust is wound up on or before that date or the settlor elects to be subject to the new settlor regime from that date. Where either of these options applies, distributions of capital profits and the corpus of the trust made on or before 31 March 1989 should be exempt from tax in beneficiaries' hands;

s where neither option outlined in (r) applies in respect of settlements in existence on 17 December 1987 made by residents, other than testamentary settlements:

i all distributions, whether of income or capital (other than of the corpus of the trust), should be assessable in the hands of a resident beneficiary subject to an interest charge calculated from 1 April 1988, with the beneficiary receiving a credit for any foreign tax paid by the trustee; and

ii where a settlor has a loan, guarantee or other form of financial assistance outstanding to the trustee, he or she should be assessed on imputed interest at a prescribed rate (less any interest actually received by the settlor or paid by the trustee, as the case may be) computed on the amount of the loan, guarantee or other assistance outstanding;

t in the case of testamentary trusts in existence on 17 December 1987 where the deceased person was a resident and which do not wind up pursuant to recommendation (r):

i distributions of capital profits made after 31 March 1989 continue to be exempt in the hands of beneficiaries; and

ii distributions of income be assessable subject to an interest charge calculated from 1 April 1988;

u where a resident makes a settlement after 17 December 1987 to a trust in existence on that date, all of the trust settlements be deemed to have been made after 17 December 1987;

v taxpayers be required to make full disclosure of all settlements to trusts with non-resident trustees existing on 1 April 1988;

w the implementation date for the proposed changes to the treatment of distributions from non-resident trusts be 17 December 1987;

x the implementation date for the foreign investment fund regime be 1 April 1988;

Other Reforms

y in addition to giving priority to the extension of the income tax base to include capital gains, the Government give priority to the introduction of interjurisdictional allocation rules, such as expense allocation rules and more effective transfer pricing provisions.

9.2 Conclusion

9.2.1 We believe that the regime we have outlined goes as far as is practicable towards achieving the Government's objectives within the boundaries of existing income tax principles, given the constraints imposed by compliance and administrative costs. It differs from the CD proposals primarily by introducing a control test and a grey list exemption to the BE regime, curtailing the scope of the CV regime and giving more transitional relief. While our regime is more limited in scope than that in the CD, we have sought to make it effective in its area of application.

9.2.2 Once we have your response to our recommendations, we will consider the more detailed design issues and advance the draft legislation. There are many subsidiary issues to consider. We will report further on these, along with our proposed draft legislation.