Profit distribution plan changes planned

The outline of the government's approach to profit distribution plan (PDPs) bonus share issues has been set out in an options paper from the Inland Revenue Department.

The government signalled in April it intended to clamp down on such plans in order to make sure they are taxed the same way as shares issued under other dividend reinvestment plans (DRPs).

With a DRP the default option is the shareholder receives a cash dividend: with PDPs the reverse is the case.

Firms such as Contact Energy and Sky City are using such plans, which allow shareholders to take payments in the form of a bonus share issue.  If the shares are then sold back to the company there does not seme to be a problem but if they are not they are not necessarily taxed as income.

The IRD had previously given the go-ahead for Contact's PDP plan and it was seen as no coincidence the April announcement came just after that ruling had expired.

The IRD has also fielded a rising number of inquires about PDPs as firms looking for ways to improve cash holdings examined PDPs as an option rather than paying dividends in one form or another.

The department is proposing using existing tax law in this area but extending it, bringing PDPs under "bonus issues in lieu" provisions in section YA 1 of the Income Tax Act.

The current definition is:

(a)        a bonus issue; or

(b)        money; or

(c)        money's worth, other than money's worth that is a bonus issue.

The department proposes changing this to read:

(a)        money; or

(b)        money's worth, other than money's worth that is a bonus issue;

in lieu of or in exchange for -

(c)        the subsequent repurchase of the bonus issue; or

(d)        the right to receive the bonus issue.

At the time of the April announcement a number of tax practitioners warned of the risk of double taxation if firms still offer dividend payments and the options paper explicitly seeks feedback on this issue.

Submissions close on 7 August.  The full paper is at http://www.taxpolicy.ird.govt.nz/publications/index.php?catid=2

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