New Zealand: Proposed company tax “integrity measures”

A number of changes to the dividend and income attribution rules for closely held companies is being proposed

A number of changes are being proposed for closely held companies

A number of changes to the dividend and income attribution rules for closely held companies are being proposed to address perceived opportunities to avoid the 39% individual (personal) tax rate.

The proposals include:

  • Treating the sale of shares in a company by the controlling shareholder as a taxable dividend to the shareholder to the extent of the company’s undistributed (i.e., retained) earnings other than from capital gains.
  • Requiring companies to maintain a record of their available subscribed capital and net capital gains, so that these amounts can be more easily and accurately calculated at the time of a share cancellation or liquidation.
  • Removing the “80% one buyer” test for application of the personal services attribution rule for shareholder employees. This would require the company’s income to be attributed and taxed at the shareholder employee’s marginal tax rate, which may be higher than 28%.

KPMG observation

The proposals are significant but not entirely unexpected.

The proposed “sale of shares” rule, in particular, would potentially have broad implications for private companies and their controlling shareholders. Inevitably, there would be greater complexity and inaccuracy as a result of the application of this rule.

Tax professionals have observed that it is worth noting that this is not the full extent of potential “integrity measures” being considered. The government indicated that it also will be looking at trusts and the retention of company profits.

Read a March 2022 report prepared by the KPMG member firm in New Zealand

 

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