A proposed "spin off" by Melbourne-based BHP provides a timely reminder that overseas company reorganisations can create unfortunate (and sometimes unforeseen) tax implications for a NZ shareholder. Such company reorganisations could be called a number of things - e.g. spin-offs or demergers and NZ shareholders and their tax advisers need to understand the nature of the reorganization in order to determine the appropriate tax treatment in NZ.
Put simply the NZ tax implications arising from overseas company reorganisations and transactions can often be very different from the tax treatment for shareholders in the country where the company is based or incorporated. For example, just because shares issued as part of an Australian company spin-off might be tax-free for an Australian shareholder, it doesn’t mean it will be tax-free to a NZ shareholder.
In short care is required. NZ has a very broad definition of dividends. It captures all types of dividends and distributions, not just those which are received in cash. If the company itself declares that there is a dividend or distribution to shareholders, then the default position would be that this is a dividend for NZ tax purposes, even if no cash changes hands. In some cases, the NZ legislation can deem there to be a dividend even though there is no dividend under company law. This can catch scenarios where there is some kind of net "transfer of value" from the company to a shareholder or to someone associated with a shareholder. The transfer of value could by either money or "money's worth".
Adding to the complexity for NZ shareholders are the different NZ tax regimes which can apply to calculation of income from shares in overseas companies. For example, if the overseas investment is subject to the Foreign Investment Fund (FIF) regime, the effect of the company reorganisation would be absorbed into the calculations for the relevant FIF method. Under the Fair Dividend Method (FDR) method, the tax effect of the reorganisation may not become apparent until the next tax year because of the "opening market value x 5%" calculation. On the other hand the where the company is based in Australia it may be exempt from the FIF regime and a separate analysis will be required.
Different terminologies and different tax treatments simply add to the complexity. Terms like capital dividends" or "capital distributions" don’t make that distribution tax free in NZ. Other problem areas can arise with unit trusts and limited partnerships. The lack of mutual recognition of imputation and franking credits between Australia and NZ exacerbate the tax cost to a NZ shareholder.
There a plenty of traps for the unwary and specific advice should be sought when your overseas investment does something which may look a bit different to your ordinary cash dividend.
Bodies Corporate & GST
Until recently, there has been some uncertainty concerning the ability of bodies corporate to register for GST purposes.
The High Court case "Taupo Ika Nui Body Corporate v C of IR (1997)" looked at the GST treatment of body corporate levies. The judge in that particular case considered that both the definition of consideration contained in the GST Act and the concept of consideration as used in the law of contract involved an element of reciprocity. Therefore, he concluded that a body corporate's management of a time-share resort (for which it levied maintenance fees against the proprietors of the time-share units) was not a supply for a consideration because the body corporate merely handled funds to pay independent contractors to carry out maintenance work.
Inland Revenue’s view has fluctuated over the period. Its view used to be that bodies corporate should not be allowed to register for GST purposes. However, in an "issues paper" released in May 2013, IR stated that its view might not be correct in relation to a number of services required by the Unit Titles Act 2010. The issues paper contained some useful observations on the unit titles legislation:
- A body corporate is a separate legal entity from the owners who are its members.
- A body corporate establishes funds to cover required and optional expenditure and levies the owners for the amounts it needs to raise for these funds.
- Common property is legally owned by the body corporate but beneficial ownership is with the owners.
- The legislation specifies the rights and duties of the owners and the body corporate for the property in the unit title development.
- As the levies are presumably set to meet the anticipated costs of each fund, the contributions will rise or fall depending on the budget of the body corporate and anticipated expenditure. The budget should reflect the costs which the body corporate incurs in undertaking its obligations under Unit Titles Act 2010.
The Officials tentatively decided that bodies corporate could register for GST, and were in fact required to do so if the value of their "taxable supplies" exceeded the $60,000 mandatory registration threshold.
However this new interpretation would require a large number of them to register for GST, so in a 2014 Discussion Document, IR proposed that bodies corporate should be prevented from registering, to save compliance costs, but that there should be a 'look-through ' mechanism to allow GST-registered members to possibly recover their proportionate share of GST levied on the body corporate.
That proposal has been superseded by the Taxation (Annual rates for 2015-16, Research and Development, and Remedial Matters) Bill which is currently before Parliament. The new legislation will have the following effect, if enacted as currently drafted:
- The term "body corporate" will have the same meaning as in the Unit Titles Act 2010, but for the purposes of the GST legislation it will not include a body corporate of a retirement village which is registered under the Retirement Villages Act 2003.
- A body corporate which is already registered will have that position "protected", and can stay registered if it wants to.
- GST registration will be optional for most bodies corporate (supplies by a body corporate to its members are ignored for the purposes of the mandatory registration rule only).
- Should a body corporate choose to register, the registration cannot be backdated, and an output tax liability will be imposed in respect of funds held by the body corporate at the time of registration. This rule is intended to deny a tax advantage from claiming input deductions from the application of levy income which was not subject to GST.
- There will be a 4 year lock-in period to stop bodies corporate from continually changing their registration status.
- If a body corporate subsequently deregisters, the value of the common property on deregistration will be treated as nil. This is in contrast to the general rule which states that a registered person is liable for output tax on the market value of the assets retained on deregistration. Note the body corporate would not be refunded any GST paid on its funds held at the time of deregistration.
If a body corporate is contemplating whether or not to register for GST, it will need to factor in the related compliance costs, the one-off adjustment required upon registration, how its forecast income and expenditure would be impacted by being registered, and what the implications would be for the unit owners.