Government to Clarify Tax Issues for Brierley ShareholdersFinance
Finance and Revenue Minister Sir William Birch said today that the tax treatment of Brierley Investments Limited shareholders would be clarified in law.
He said the clarification would be designed to ensure in general that most individual Brierley investors would not be affected by the proposed migration of Brierley.
"Investments into a number of countries can be subject to New Zealand’s international tax rules including the foreign investment fund (FIF) rules. Although the intent of the FIF rules is clear, they do not cater explicitly for companies that migrate.
"The key issue for shareholders affected by the migration is the value at which their shares become subject to these rules. The Government intends to introduce legislation to clarify that, for migrating companies, the shares enter the FIF rules at the market value on the day the company migrates. This reflects the policy as currently set out in the FIF legislation.
"Individuals who hold shares in FIFs that cost less than $20,000 in total are exempt from applying the FIF rules. We will also clarify that, for migrating companies, this cost will be measured with reference to market value at the date of migration.
"The Government understands that, of Brierley’s 107,000 shareholders, 90,000 own fewer than 10,000 shares. Most individuals have small shareholdings that will make them exempt from the FIF rules.
"Their tax consequences will be unchanged. They will continue to be taxed on dividends received. The only difference will be that imputation credits will not be available to them. Any gains that are capital under the current law will continue to be tax-free.
"Those Brierley shareholders who are affected by the migration will be able to elect from four options to account for their income from their shares. This allows them to choose the option best for them. These options are described in the attached annex.
"Inland Revenue has advised the Government that there is no prospect under the current FIF rules of shareholders being able to convert capital losses into tax deductible losses as a result of the migration," Sir William said.
Accounting for income from FIFs under present law
- The branch equivalent method requires the income of a foreign entity to be re-cast as if the foreign entity were a branch of a New Zealand company. This requires shareholders to have access to sufficient information to enable relevant calculations to be made, and is likely to involve high compliance costs if it can be used.
- The accounting profits method attributes to a shareholder their proportionate share of the foreign investment fund's consolidated after-tax accounting profits.
- The comparative value method calculates a taxpayer's foreign investment fund income as the amount of any dividends received plus the change in the market value of their investment over the year (adjusted for any capital invested or withdrawn during the year).
- The deemed rate of return method calculates FIF income by imputing a deemed rate of return on the foreign investment fund’s opening book value, or cost if acquired during the year. For the 1998-1999 income year the rate is 9.82 percent. This rate is adjusted annually.