Non-cash dividends IS finalised
IR has now released its final version of IS 21/05 titled ‘non-cash dividends’.
The statement considers when a transfer of company value from a company to a shareholder is treated as a dividend for tax purposes. It focuses on the types of non-cash transactions that are often entered into between small and medium-sized companies and their shareholders.
A good starting point I find is useful, which is reinforced in the statement, is to ask yourself in scenarios where there has been a transfer of value from the company to a person – what is the reason for the transfer, and in this respect, how are the company and the person connected?
Where the transfer of value is caused by an employment relationship, the transfer will usually be taxed either as employment income, or as a fringe benefit, and usually not as a dividend. However, in some cases where the non-cash benefit is provided to an employee who is also a shareholder, FBT rules either require that the benefit be treated as a dividend and not as a fringe benefit, or allow the company to choose whether to treat the benefit as a fringe benefit or a dividend.
IS 21/05 is focussed on those scenarios where the transfer of value is not caused by an employment relationship, or the fringe benefit rules allow the company to choose, or require the company to treat the transfer as a dividend.
The commentary commences with a discussion on section CD 4, which considers transfers of company value generally – a dividend is a transfer of company value from a company to a person, if the cause of the transfer is a shareholding in the company; and none of the exclusions in subpart CD apply.
Next there is a discussion on section CD 5, which provides more clarification on the meaning of the term ‘transfer of company value’ (with a number of simple examples), which then leads into a discussion on section CD 6 (with more simple examples), of whether the transfer of value would be seen to have been caused by a shareholding relationship with the company – remembering that the recipient of the value transfer does not actually have to be a shareholder in the company.
A couple of pages of IS 21/05 are then dedicated to some specific transactions that would be treated as dividends and some that would not, before then moving on to commentary surrounding how to calculate the value of the benefit – the general formula provided under section CD 38 in this regard, being value from company minus value from person.
Now from a timing perspective, it is important to note that in most cases a dividend will be treated as having been paid on the date the transfer of value arises, with the exception being where the dividend relates to a scenario where the company has made property available to a person – the timing of the dividend deemed to have been paid six months after the end of the company’s income year, unless the company gives the shareholder earlier notice of the amount of the dividend.
In relation to the dividend timing, commentary is also provided in IS 21/05 regarding the potential negative impact on the company’s imputation credit account, where it is discovered in hindsight that a non-cash dividend has arisen, and fully imputed dividends have been paid by the company post that deemed date of payment. This is due to the application of the benchmark dividend rules, which will apply where a company pays more than one dividend during any tax year (including a non-cash dividend). Under those rules the first dividend of the year is the benchmark dividend, and the imputation ratio of all dividends paid during the year must match the benchmark dividend. This means that if an unimputed non-cash dividend is the first dividend paid in a tax year, no other dividends paid in that year can be imputed.
The negative imputation credit account impact is due to the benchmark dividend rules requiring that any dividend paid after the benchmark dividend that is not imputed at the same rate as the benchmark dividend (including a non-cash dividend), will result in a debit to the imputation credit account. This will occur despite no imputation credits having been attached to the dividend. Now the debiting of the ICA can be avoided by filing a ratio change declaration to IR, however to be effective, this needs to be done prior to the payment of the subsequent fully imputed dividends – often of no assistance therefore to non-cash dividends discovered at a later date.
The statement commentary concludes with some paragraphs on employment income, fringe benefits, LTC’s and qualifying companies.
As a final note on IS 21/05, it does only cover the basics of non-cash dividends in its 23 pages, so don’t expect any answers to any complex scenarios you may have in front of you, nor any commentary surrounding your administrative obligations – disclosures, requirements to provide dividend statements, withholding tax obligations etc.
Self-employed meal expenses IS finalised
IR has also released its finalised version of IS 21/06, titled ‘Income tax and GST – treatment of meal expenses’.
The main focus of the IS is the deductibility of meal expenses by a self-employed taxpayer, with IR recognising that there is a distinct difference in the deductibility rules between self-employed taxpayers who trade on their own account versus those who decide to incorporate and trade via the company form, and employees.
In this regard, IR concludes that most self-employed taxpayers will have neither an income tax deduction nor a GST input tax credit entitlement in relation to the cost of meals they incur during their work activities. The only exceptions may be where the person can show that they incurred ‘extra meal costs’ – those in excess of the usual cost to feed themselves (which is considered being of a private or domestic nature, therefore subject to the private limitation), due to being at a remote working location or unusual working hours.
The first 15 pages of the commentary (out of a 36 page total) is in essence a regurgitation of the case law on the subject – it could be considered interesting if you have the time to read – otherwise do not pass go and head immediately to page 15 for the summary conclusion.
Post that conclusion, there is then some useful narrative on the payment of allowances to employees and the application of a number of section CW 17 provisions to these types of payments. There is then a brief discussion on closely held companies, before the commentary moves to the entertainment regime and the potential application of section DD 1.
GST is up for discussion next – basically just follow your income tax determination – if the expenditure is considered of a private and domestic nature, then you’re not exactly going to be entitled to a GST input tax claim now are you.
Finally, there are seven pages of examples, by the end of which, hopefully all of your questions on the topic will have been answered.
This article from the ‘A Week in Review’ newsletter was originally published Monday 12th July 2021. If you have any questions or would like a second opinion on any national or international tax issues, please contact me firstname.lastname@example.org.
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