Dividends paid within a New Zealand wholly owned group

Section CW 10 of the Income Tax Act 2007 

The amendment (section 8 of Taxation (Tax Administration and Remedial Matters) Act 2011) removes the common balance date requirement from section CW 10.

Background

Section CW 10 of the Income Tax Act 2007 treats as exempt income, dividends paid between New Zealand-resident companies that are in the same wholly owned group.

However, this exemption does not apply if common balance date requirements are not satisfied. This distorts the original purpose of the rules, which is to allow the movement of capital within a wholly owned group of companies, and imposes an unnecessary compliance cost upon those companies.

Key features

The repeal of the common balance date requirement removes an inappropriate restriction on the dividend exemption for New Zealand-resident wholly owned companies. The restriction created additional compliance costs for taxpayers, and proved to be inconsistent with the purpose of the rule.

Application dates

The amendment will apply to dividends derived by a company on or after the first day of that company's 2010-11 income year, unless the company is a Māori Authority.

For a company that is a Māori Authority, the amendment applies to dividends derived by the Authority on or after the first day of the 2012-13 income year.

The later application date for a Māori Authority ensures that Māori Authority Credits attached to a taxable distribution from a Māori Authority do not give rise to unintended retrospective effects for beneficiaries of a Māori Authority.

Detailed analysis

The purpose of the intra-group dividend exemption within a wholly owned group is to facilitate the movement of capital around a wholly owned group, without taxation being a distortionary or inhibiting factor.

At present, if the paying and receiving companies do not have a common balance date, and the differences in the balance dates are not supported by commercial reasons, the dividend is not exempt.

In practice, the provision did not often apply because companies in a wholly owned group not meeting the common balance date requirement tended to use non-dividend methods to move capital around the wholly owned group company.