LAWCOMM 403 long notes.docx-CONTENTS Tip...
LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................
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LAWCOMM 403 long notes.docx-CONTENT...
LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................
##### Page 117
A decision is made to liquidate the company
Tax consequences for 50% trustee shareholders and 50% individual shareholders
Under secon CD 26 Maggio Ltd can return the available subscribed capital per share
calculated under the ordering rule and the available capital distribuon amount calculated
under secon CD 44 tax free. Only an amount in excess of this amount will be subject to tax.
The total amount returned to shareholders per share is \$2.58.
The available subscribed capital per share is calculated under secon CD 23 as discussed
previously, however in this case all shares are being cancelled. This means both the
numerator and the denominator will be 100,000 so the available subscribed capital per share
is \$1.
The available capital distribuon amount is calculated using the formula and secon CD 44
(1). In respect of one share the inial calculaon of the amount of receipt less ASC per share
is \$1.58 (\$2.58 - \$1). This is mulplied by the capital gains (\$50,000) plus any capital property
distributed minus its cost (nil), less any capital losses (Nil); divided by total receipts minus
total available subscribed capital (\$258,000 minus \$100,000).
Receipt – ASC per share = 2.58 – 1 = 1.58
Capital gains + capital property distributed – cost = 50,000 + 0 – 0 = 50,000
Total receipts – total ASC = 258,000 – 100,000 = 158,000
\$1.58 mes 50,000 divided by 158,000 equals \$.50 per share. This is the available capital
distribuon amount. The excess beyond these two amounts totalling \$1.50 constute a
dividend of \$1.08 which will be taxable. However imputaon credits will be aached (at the
rate of a maximum of 28/72 per secon OA 18) and these will be able to be oﬀset against the
resultant tax liability for the two shareholders.
The formula is 1.58 x 50,000
÷ 158,000 = 0.5
So, shareholders get \$2.58 per share, but \$1 of it is tax-free ASC, and \$0.50 of it is
tax-free capital proﬁts
Therefore, the \$1.08 extra is a taxable dividend
TAXATION OF CASH DIVIDENDS
The overall regime for taxaon of dividends:
o
Is there an assessable dividend (i.e. a transfer of value)?
o
Deal with imputaon credits:
The company ﬁrst pays tax on the gross proﬁts, then pays the net proﬁt as a dividend
The company can impute credits to the dividend at a maximum rao of 28/72
o
If the payment is to an individual, resident withholding tax must also be withheld from the dividend
IMPUTATION CREDITS
Under a classical corporate tax system:
o
The company pays tax on its proﬁts at 28% – they then distribute the taxed proﬁts as a dividend
o
Shareholders pay tax on the dividend
o
Therefore, the same amount of economic income gets taxed twice
A dividend derived by a person is income of the person (
secon CD 1
)
This aligns with the long-standing treatment in the common law that any return to
shareholders was dividend income
The common law has long held that there are two separate forms of income here:
The income the company derives (e.g. from carrying on a business)
The income derived by the shareholder from the company (dividends) – this income
is separate from the company’s income
The problem here is that the same economic income is being derived by the company and
the shareholders, and thus is taxed twice – the company makes a proﬁt (which is taxable),
which it distributes to shareholders as a dividend (which is taxable)
As a result, New Zealand has developed the imputaon regime – shareholders get a
credit for the tax that the company has paid
Example

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