| Description of issue |
This potential unintended change was created by the amendment to the wording of clause LE 3(3)(e) made by the Select Committee when it reviewed (what is now) the New Act. The Select Committee altered clause LE 3(3)(e) from saying ". unless sections CW 9 and CW 10 apply" to saying "or are exempt income under any of sections CW 9 10 CW 11". While the correction to include section CW 11 brought the entire current section CB 10 within the scope of the provision, the removal of the negative "unless" reversed the exemption that previously applied to section CB 10 (the current equivalent of sections CW 9 to CW 11 of the New Act).
The new Act provides that a section LE 3 holding company must give notice of revocation of that status if: (e) dividends derived by the former section LE 3 holding company are excluded income or exempt income under any of sections CW 9 to CW 11. This has the reverse effect to section LE 3(3)(e) in the current Act. In all the situations listed above the new section LE 3(3)(e) would deem the LE 3 holding company's status to be revoked, contrary to the operation of the current provision. |
| Section / Provision Income Tax Act 1994 |
LE 3
The foreign investor tax credit regime allows a resident company to pay a supplementary dividend to its non-resident shareholders in addition to any dividend it declares. The purpose of the regime is to ensure that earnings distributed by NZ resident companies to non-residents are subject to tax only to the extent of 33%. The regime achieves this outcome by providing a credit of tax to a company paying a dividend to a non-resident shareholder. This credit is designed to be equal to the non-resident withholding tax deducted from the dividend such that the total tax on the underlying earnings (both income tax and non resident withholding tax on amounts distributed) does not exceed 33%.
The supplementary dividend is effectively funded by a tax credit received by the resident company. In some cases, a resident holding company may not be able to utilise the credit as its only income is fully imputed dividends from other resident companies. Section LE 3 allows the holding company to be treated as if it were a non-resident. This allows lower tier operating companies to pay a supplementary dividend and gain a tax credit, which can be used to offset tax otherwise payable.
Under the current Act section LE 3(3)(e) operates so as to deem section LE 3 holding company notices to be revoked when the section LE 3 holding company receives dividends that "are not gross income", other than under section CB 10.
This means that:
| a) |
a company receiving dividends from a foreign company; |
| b) |
a company receiving dividends from a member of the same wholly owned group; |
| c) |
a company that is a conduit tax relief holding company receiving a dividend with a conduit tax relief credit attached, to the extent it is fully conduit tax relief credited; |
| d) |
a company that is a conduit tax relief holding company that receives a conduit tax relief additional dividend; and |
| e) |
an existing company, as defined in section 5 of the Dairy Industry Restructuring Act 2001 that derives a dividend as a result of a buy-out of the company's interests in the New Zealand Diary Board under Schedule 4 of that Act;
can remain a section LE 3 holding company and is unaffected by the deemed revocation provision in section LE 3(3). |
|
| Outcome |
8 March 2005
The Panel agreed that there had been an unintended legislative change and recommends that Inland Revenue seek Ministerial approval to retrospectively amend section LE 3(3)(e) of the ITA 2004 to indicate the existence of a clear exception under sections CW 9 to CW 11.
22 March 2005
Ministerial approval has been given, and officials will endeavour to get the amendment into the next available tax Bill. |
