'Unfair' demerger tax rules for shareholders

  • 13/09/2015
Shares (iStock)
Shares (iStock)

By Fiona Rotherham

New Zealanders are being taxed on their own capital because of unfair rules covering shares in demerged companies, but the government won't fix the problem, the New Zealand Shareholders' Association says.

NZSA chairman John Hawkins said Revenue Minister Todd McClay wrote to him saying there was merit in the argument that taxing shares in demerged companies was unfair.

But Mr McClay said tackling the issue would require a law change and the Inland Revenue Department wasn't resourced to deal with it.

"Frankly that is not good enough," Mr Hawkins told the association's annual conference in Hamilton yesterday.

He cited the example of when BHP Billiton demerged South32 into a separate business earlier this year. There was no dividend paid and no change in the overall value of the shareholding. Investors were given the same value of shares in South32 as they had in BHP.

BHP retained its core business of iron ore, copper, coal, petroleum, and potash, which were its highest-margin assets, while the rest of its assets were put into South32.

The Australian Taxation Office issued a class ruling in June saying Australian resident shareholders of BHP Billiton wouldn't be taxed on the receipt of the ASX-listed shares of South32, which is headquartered in Perth.

But Mr Hawkins said in New Zealand, BHP shareholders had to pay tax at their marginal rate on the full value of the South32 shares, despite there being no change in value.

"We don't mind paying tax on dividends but why should we pay tax when it's purely a split of our own capital," he said.

Another example he cited was when Westfield demerged its Australian and New Zealand property assets into Scentre Group.

Shareholders in New Zealand found they didn't have to pay tax if subject to the foreign investment fund (FIF) tax regime but if they were under the $50,000 FIF threshold, then they were liable for tax on the full value of the demerger.

"We're not talking about taxing capital gains here, we're talking about taxing your own existing capital as if it was income," he said.

"What is the message that the government is sending by taxing the actual capital invested in productive enterprises'"

With input from PwC, the Shareholders' Association has identified a one-paragraph amendment to the tax legislation that would potentially resolve many of the demerger tax issues in Australia where many Kiwis invest, while a longer-term fix is worked on for other jurisdictions.