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Warning against Dividend Stripping

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Inland Revenue has issued a Revenue Alert (RA 18/01), advising that some share sales to related entities may be considered tax avoidance in the form of dividend stripping.

Revenue Alerts are issued by the Commissioner of Inland Revenue to provide information and guidance about significant current tax planning issues.

Inland Revenue Spokesperson Graham Tubb said that the Department is increasingly seeing corporate distributions effectively structured as sales of shares to related persons in situations where there is little or no underlying economic change in ownership or control, a practice called dividend stripping.

How it is done

“These are transactions which transfer value to a shareholder but the way they are being structured makes it look like it is just a sale to, for example, a company in which the seller or close associate also has a significant direct or indirect shareholding,” Mr Tubb said.

“The effect is that the seller, in reality, retains ownership of the interest which is transferred. So, if the seller’s pre-and post-sale ownership is effectively the same, but the seller receives value from the share sale, the greater the likelihood that the transaction could be treated as a dividend by reason of the tax avoidance rules,” he added.

The assessment process

Where Inland Revenue considers that the sale proceeds, debt repayments or other value transferred are in substance a dividend, the shareholder will be assessed on the amount of the dividend. Resident or non-resident withholding tax, along with shortfall penalties, may also be applied.

If a taxpayer has concerns about any such transactions as a result of this Revenue Alert, they should seek professional advice and potentially consider making a voluntary disclosure to Inland Revenue, Mr Tubb said.

“I would certainly encourage anyone for whom this may apply to contact us,” he added.

The Revenue Alert can be viewed at www.ird.govt.nz

 

 

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