Tax exclusion for non-participating shares

Section CX 55 of the Income Tax Act 2007

The capital gains exemption that applies to PIEs investing in New Zealand and Australian listed shares has been narrowed to ensure that it only applies to shares that carry equity risk.

Background

Section CX 55 of the Income Tax Act 2007 provides that income from a PIE's share-trading gains from New Zealand and certain Australian shares is generally excluded. When this rule was developed, it was only intended that it would apply to shares that provide a true equity interest in the underlying company. Reflecting this intention, the share-trading exemption did not apply to non-participating redeemable shares.

Nevertheless, some types of share do not provide a true equity interest yet do not fall within the definition of a non-participating redeemable share. Further, some elements of the definition are of no concern from a policy perspective, for example, it is irrelevant whether a share carries voting rights.

Accordingly, the share-trading exclusion has been amended to more closely reflect the original policy intent. Specifically, the share-trading exclusion no longer applies to shares that are:

• a fixed-rate share; or
• a share to which the amount payable on its cancellation is no more than the original subscription amount of the share.

Application date

The amendment applies from the date of Royal assent, being 2 November 2012.