How the law could be amended
3.2 Current law includes the concept of a “bonus issue in lieu”, a taxable dividend. In essence, a bonus issue in lieu arises when a shareholder is explicitly given a choice between receiving a “bonus issue” or a cash dividend.
3.3 The reason for deeming a bonus issue in lieu to be a taxable dividend is because of concerns about potential opportunities for imputation credit streaming. Specifically, if a bonus issue in lieu was not taxable there is concern that shareholders who are able to use imputation credits would choose to receive a cash dividend, with imputation credits attached, while those shareholders who cannot use the imputation credits would choose a non-taxable bonus issue.
3.4 The proposed legislative amendment would include the issue of bonus shares within the definition of “bonus issue in lieu” when shareholders can opt for the company to repurchase those shares.
3.5 One concern about this amendment is that treating the issue of shares under a PDP as a bonus issue in lieu and, consequently, as a taxable dividend could lead to double taxation for a shareholder who chooses to have those shares repurchased immediately by the company. That could happen if the repurchase of the shares by the company did not satisfy the “bright-line tests” set out in income tax law. [2] If that happened, the repurchase proceeds would also be treated as a taxable dividend.
3.6 In such cases double taxation could be eliminated by excluding the repurchase from the dividend definition. We are also considering how the rules would work when a company held the bonus shares as treasury stock. [3]
3.7 We are particularly interested in hearing about any difficulties the proposed solution might give rise to – whether in relation to company law, administration or compliance.
Legislative detail
3.8 The current definition of “bonus issue in lieu” in section YA 1 is as follows:
“Bonus issue in lieu” means a bonus issue made, on or after 1 October 1988, under an arrangement conferring on shareholders of a company an election whether to receive –
(a) a bonus issue; or
(b) money; or
(c) money’s worth, other than money’s worth that is a bonus issue.
3.9 The definition of “bonus issue in lieu” in section YA 1 could be amended along the following lines:
“Bonus issue in lieu” means a bonus issue made, on or after EFFECTIVE DATE, under an arrangement conferring on shareholders of a company an election whether to receive –
(a) money; or
(b) money’s worth, other than money’s worth that is a bonus issue;
in lieu of or in exchange for –
(c) the subsequent repurchase of the bonus issue; or
(d) the right to receive the bonus issue.
Date of application
3.10 The proposed legislative amendment would have prospective application. Given there is no necessity for this amendment to operate from the beginning of an income year, officials suggest that the amendment apply to distributions from a fixed date on or after the date of enactment.
Questions for submissions
3.11 Does the proposed legislative solution ensure consistency with the rules that underpin New Zealand’s imputation system?
3.12 Would it create any difficulties in relation to company law or compliance? If so, please specify what they are and how they could be dealt with, in your view.
3.13 In practice, is double taxation likely to occur as a result of the proposed amendment? If so, please specify how this concern could be dealt with, in your view.
2 If a distribution on the repurchase of a share is to be sourced from subscribed capital and not be deemed a dividend, the distribution must exceed certain thresholds or “brightlines” contained in section CD 22 of the Income Tax Act 2007. Different thresholds apply depending on whether the distribution occurs in a pro rata cancellation or as a result of a repurchase from selected shareholders.
3 Treasury stock is a purchase by a company of its own shares where the company determines not to cancel the shares. A company may not apply this treatment to more than 5% of its shares.