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Inland Revenue

Tax Policy

Rewrite of the Income Tax Act: dividend arising under dividend stripping rules

Clause 53(1)

Issue: Dividend in dividend stripping rules


(11 – Ernst & Young, 6 – Corporate Taxpayers Group, 5 – New Zealand Institute of Chartered Accountants)

The addition of reference to the dividend stripping rules to schedule 51 (which lists intended rewrite changes) should be amended. Section GB 1(3) should be amended to deem the amount to be assessable income without characterising it as a dividend. (Ernst & Young)

Dividends that result from the dividend stripping rules should not be subject to RWT and NRWT. (Corporate Taxpayers Group)

Schedule 51 should not confirm the drafting change in the dividend stripping rules as an intended policy change. (New Zealand Institute of Chartered Accountants)


Clause 53(1) confirms that the minor wording change in the dividend stripping rules is an intended drafting outcome in rewriting them. The Rewrite Advisory Panel had concluded that the rewritten rule in section GB 1(3) contained an unintended change in outcome that clarified the law to reflect the Commissioner’s view that the provision has always been subject to withholding tax rules.

However, officials note that whether the withholding tax regimes apply to a dividend arising under the dividend stripping rules has been a long-standing policy and interpretation issue.

Officials now consider that there are practical difficulties in applying the resident withholding tax rules to the company distributing the dividend, for the following reasons:

  • The company treated as paying the dividend may not have knowledge of the circumstances of the person treated as deriving the dividend that result from dividend stripping.
  • Other dividends arising under other anti-avoidance rules are treated as dividends paid, for which a payer can be identified are explicitly excluded from the resident withholding tax rules.

Officials note that if the payer of the dividend is not required to withhold resident withholding tax, the recipient of the dividend remains liable for the tax and any associated penalties and interest, under the normal assessment process. Officials consider this is the appropriate policy outcome.

However, officials consider that if a dividend arising from the dividend stripping rules is derived by a non-resident, the non-resident withholding tax rules remain relevant. Normally, a non-resident deriving a dividend from New Zealand is not required to file a tax return, and the NRWT withheld from the payment is a final tax. However, the NRWT rules provide that if the payer does not withhold NRWT, or does not withhold the correct amount of NRWT, the recipient must file a return of income and pay tax under the normal assessment process.

While the same practical difficulties relating to establishing a withholding obligation exist for the payer of the section dividend arising from the dividend stripping rules, officials consider the NRWT rules should continue apply to the recipient. That outcome would be consistent with the recommended effect for a resident who derives a dividend arising from the dividend stripping rules.

Officials have also considered the submission that a dividend arising from the dividend stripping rules should not be treated as a dividend, with particular reference to the application of the memorandum account rules. The memorandum account rules provide for the benefit of corporate tax to be attributed to shareholders on payment of a dividend (for example, by way of imputation credits). Officials agree with this submission, as this would ensure that:

  • The amount of the dividend does not affect the determination of the ratios for the benchmark dividend rules; and
  • The paying company is not required to issue a shareholder dividend statement retrospectively; and
  • The paying company would not attach imputation credits (or other memorandum account credits) to the dividend. This outcome is consistent with the policy of the imputation rules that imputation credits cannot be streamed to any particular shareholder, and ensures that the taxation obligation is imposed on the recipient of the dividend.


That the submission relating to schedule 51 be declined, but should not refer to withholding tax obligations.

That the submission be accepted that no withholding obligation be imposed on the company treated as paying a dividend arising from the dividend stripping rules.

That the submission that the dividend stripping rules should give rise to assessable income (not a dividend) be declined.

That the submission that memorandum account rules in Part O do not apply in relation to a section GB 1(3) dividend be accepted.