A Week In Review

HoldCo’s Beware…

IR has released its latest Revenue Alert – RA 18/01, expressing the Commissioner’s concerns regarding dividend stripping arrangements being used in restructures, which predominantly involve a holding company being inserted into the taxpayers structure, with the original shareholders deriving an effective transfer of value, even though their economic interest in the original (target) company remains the same.

RA 18/01 states that “Dividend stripping refers to the sale of shares where some or all of the amount received is in substitution for a dividend likely to have been derived by the seller but for the sale of the shares.”

A common example could be where a target company has significant retained earnings and the shareholders have large overdrawn current accounts (less than the retained earnings balance), upon which they must be charged interest to avoid deemed dividend issues. Rather than having the target company simply pay a dividend to the shareholders to clear the current account balance, the shareholders instead sell their shares to a new HoldCo (itself wholly owned by them) at a price equivalent to the retained earnings balance. HoldCo pays for the shares by accepting the shareholders debt obligations to target company, with any remaining balance just being left as a debt owed to HoldCo’s shareholders. The effect of the arrangement is a transfer of value from Holdco to the shareholders – assuming their debt obligation to target company, for nothing of value in return. Meanwhile, target company could now declare an exempt dividend (wholly owned group) to HoldCo, to offset the debt obligation it has just assumed, eliminating the requirement to continue to charge interest (or could just not charge interest now with no deemed dividend exposure).

RA 18/01 also provides examples of:

• Company that regularly pays dividends to family trust – trust sells shares to HoldCo for market value with debt back – HoldCo borrows funds from company to repay trust – effect of arrangement is no change of commercial position for trust, but now receives loan repayments rather than dividend payments.
• 50/50 owned company – one shareholder wishes to exit – HoldCo acquires both shareholdings for market value – HoldCo borrows from third party lender to pay out exiting shareholder, leaves debt owed to remaining shareholder – effect of arrangement is remaining shareholder now owns 100% of company (albeit indirectly via HoldCo) without suffering any economic consequence, plus now owed money which it can receive as a loan repayment tax free.
• Two companies where one shareholder has 100% of one and 25% of the other – very little ASC in either – HoldCo (also with minimal ASC) acquires shares in both companies for market value with debt back – few months later (and contemplated as part of original transaction), shareholder debts convert to HoldCo shares and there is an amalgamation of three companies with HoldCo remaining – effect of arrangement is shareholders have been able to merge their two companies and now have significant ASC which can be returned to them tax-free.

In all of these examples, the Commissioner is applying the Parliamentary contemplation test and using either section BG 1 or GB 1 to assess the shareholder for a dividend.

The release of RA 18/01 is also accompanied by a basic Q&A (it is quite basic!), but certainly worth noting is IR unlikely to allow IC’s to be attached to any dividend assessed (unless it’s a VD situation), so 33% DWT will apply, and just because your client’s scenario involves no actual cash exchange, does not mean there is no dividend – it all comes down to a “transfer of value from company to shareholder, caused by shareholding relationship (s.CD 4)”, which can occur where HoldCo creates debt obligation in shareholders favour.

Advice Requested or Not – That is the question…

This case is very topical to us all I thought.

How many times have you been asked by a client for “your thoughts”, and when espousing your views, how many times have you thought that it didn’t really matter what you said because you weren’t giving advice as such?

Well the High Court recently felt that a client’s request to their trusted advisor for her thoughts, was not a “request for advice” worthy of a negligence claim against the advisor when she failed to mention certain tax effects of a proposed arrangement.

A couple of things surprised me in the case –

Firstly, the accountants (a relatively high profile firm) claim that even though its engagement for the past four years included the giving of specific tax advice, in the present case there first “had to be a request for advice” and that a request from the client “for your thoughts” was not formal enough – hmmm????

Secondly, the issue surrounded a bright-line issue, with a $2.3million gain on a sale within one year of purchase so pretty black and white and certainly a material issue, yet the advisor did not think to mention it in “her thoughts”.

Now to be fair, the High Court did state that its decision was not that the client did not have a case in relation to the scope of the requested “thoughts”, but that eliminating the defence in professional negligence cases was not easily achievable and the client had not been able to satisfy the required threshold.

I would suggest that the accountants may have escaped the noose on this one, although I’m certainly no legal expert in the professional negligence arena, but would you not think, at the very least they could have credited the client for any fees they had charged in respect of the transaction, albeit a fairly immaterial gesture in respect of the $700k cheque the client now had to write to IR. Where is your goodwill to your client’s however?

I should also even the playing field a little by informing you that the client had apparently been put on notice by their legal advisers at an earlier time of the bright-line issue if the land was ever sold within two years. However, regardless, I would still be doing some navel gazing if I was the adviser, particularly where part of my regular role in the engagement, was providing tax advice.

I suspect the client is presently searching for a new accountant….

Regional Fuel Tax…

Well we all knew it was coming.

A Regional Fuel Tax Bill has been introduced, and is topical for this update, not because it is a type of tax in itself, but because once imposed it will be subject to GST and consequently relevant provisions of the GST Act will be amended to reflect this treatment.

Capped at the maximum rate of 10 cents per litre of fuel, for a maximum initial duration of ten years and it will only be available to the Auckland council until 1st January 2021, when it will become available to other regional councils.

Richard Ashby BBus, CA, CPA PARTNER
Em: [email protected]

Ph: +64 9 365 5532

Fx: +64 9 309 5260

Mb: +64 21 823 464