TO: FINANCE AND EXPENDITURE COMMITTEE CLERK OF THE COMMITTEE, SELECT COMMITTEE OFFICE

Transcription

1 TO: FINANCE AND EXPENDITURE COMMITTEE CLERK OF THE COMMITTEE, SELECT COMMITTEE OFFICE ON: TAXATION (ANNUAL RATES FOR , EMPLOYMENT AND INVESTMENT INCOME, AND REMEDIAL MATTERS) BILL 5 JULY 2017

2 INTRODUCTION 1 This submission is from Chapman Tripp, PO Box 993, Wellington We wish to speak to the Committee in support of our written submissions. 2 Should you require further information, please contact: ABOUT CHAPMAN TRIPP 3 Chapman Tripp is a full service corporate law firm with offices in Auckland, Wellington and Christchurch. 4 Thank you for the opportunity to make a submission on the Taxation (Annual Rates for , Employment and Investment Income, and Remedial Matters) Bill (the Bill). SUMMARY OF SUBMISSIONS 5 With respect to the proposed demerger section, we submit that: 5.1 the exception for NZ shareholders of ASX-listed companies ought to be extended to NZ shareholders of NZ-listed companies as well; and 5.2 there are potential issues with the current draft wording of the section. We have identified those issues in our discussion below. 6 With respect to the proposed changes on employee share schemes, while we are broadly supportive of the proposals in the Bill on the basis that they provide greater

3 clarity of the tax treatment of employee share schemes and should simplify the design and operation of such schemes, we submit that: 6.1 the rules should be amended to confirm that the cost of setting up a scheme and accounting and legal fees (for setting up the scheme and on an ongoing basis) fall within the meaning of administrative or management services ; 6.2 the rules should be amended to confirm that the timing of an employer s deduction is the same as the employee s share scheme taxing date; and 6.3 section CE 7B should contain examples clarifying the application of the no real risk test. 7 With respect to the proposed changes on petroleum mining decommissioning, we participated in the preparation and reviewed the final draft of the submissions made by the Petroleum Exploration and Production Association of New Zealand (PEPANZ) and support those submissions. COMPANY SPLITS BY AUSTRALIAN ASX LISTED COMPANIES (CLAUSES 8, 45, 63, 172(3) AND 182) 8 The above clauses propose to amend the dividend rules so that the receipt of shares by New Zealand shareholders as a result of a demerger of a listed Australian company or not treated as a dividend in certain circumstances. 9 We are supportive of the proposal, subject to the following comments: 9.1 the exclusion should be widened to apply to New Zealand-listed companies; and 9.2 drafting changes may be required to properly give effect to the proposal in relation to ASX-listed companies. 10 We discuss each of these matters below. Exclusion should be widened to New Zealand listed companies 11 We acknowledge that commentary on the bill highlights the limited scope of the changes and notes that consideration of a more comprehensive set of rules for demergers by New Zealand and other non-resident companies would need to be separately prioritised. However, we submit that extending the exclusion to New Zealand listed companies should be progressed with the same priority as the ASX listed changes. 12 We make the following points in support for this submission:

4 12.1 A demerger involves the restructuring of existing assets owned by existing shareholders. There is no distribution of revenue or profit to shareholders and shareholders fundamentally hold the same interest in the same underlying assets following the demerger (albeit through shares in two companies as compared with one). Taxation of shares received on a demerger as a dividend is inconsistent with the economic substance of the transaction The proposed rule may provide an incentive for NZ shareholders to invest in Australian listed companies as compared with NZ listed companies. We consider that, at a minimum, there should be consistency in tax treatment of demergers as between NZ and Australian listed equities. A case could be made for more generous rules in relation to NZ listed equities to support development of NZ capital markets While the Regulatory Impact Statement (RIS) considers that there is a lesser need for reform since NZ entities can often structure the demerger so that no dividend arises, this in itself is not a principled reason against extending the demerger relief to NZ listed companies. It will likely be the case that it is not possible in all cases to structure a transaction in a way that does not give rise to a dividend. In any event, the need to structure around the issue gives rise to additional and unnecessary compliance costs. It is frequently necessary to apply to the High Court for approval for the transaction, which involves costs in the tens of thousands of dollars, several months delay and is a bad use of Court time We do not consider that extensive (or any material) policy work would be required to extend the proposals to NZ listed companies. There are sufficient safeguards in the current proposal to counteract any perceived tax risk arising from an extension of the proposal to New Zealand listed companies. For example: (a) (b) (c) Under the proposed section ED 2B(5), a demerger will not present an opportunity to artificially inflate available subscribed capital (ASC). Given the constraint on ASC, the potential concern raised in the RIS that a subsequent liquidation of the demerged subsidiary could lead to a taxfree transfer of value to the shareholders should not be relevant. The demerger should not impact on the tax treatment of the disposal of shares in the new entity. If shareholders originally hold shares on revenue account, we expect shares in the demerged entity would be held on a similar basis, with proceeds taxed on disposal.

5 Proposed draft wording 13 We consider only minimal drafting changes would be required to extend the proposals to NZX listed companies. We propose the following: 13.1 In section ED 2B(1): (a) (b) Revise section ED 2B(1)(a) to read a company (the splitting company) is an ASX-listed Australian company under subsection 7 or a New Zealand-listed company under subsection 8 and Revise section ED 2B (1)(d) to read where the splitting company is an ASX-listed company under subsection 7, the share transfer is not a dividend 13.2 After section ED 2B(7), insert new subsection ED 2B(8): Meaning of New Zealand-listed company (8) New Zealand-listed company means a company that has shares quoted on an official list of a recognised exchange in New Zealand. Potential drafting issues with current proposal 14 Independently of our submission above that the exclusion should be extended to NZ listed companies, we submit that consideration should be given to amending proposed section ED 2B to ensure it achieves the desired outcome in the following respects: 14.1 The current wording of the proposed sections ED 2B(1)(d) and ED 2B(6) appear to require that a share transfer is (or is not) a dividend in whole. This does not align with the Australian legislation, which allows the Commissioner to determine that a demerger benefit is in whole or in part not a demerger dividend. 1 As such, we submit that section ED 2B is amended to provide relief to the extent that the transaction is not a dividend for Australian purposes. Suitable revised wording would be as follows: (a) (b) to the extent that the share transfer is not a dividend under the Income Tax Assessment Act 1936 (Aust) in section ED 2B(1)(d); and the transfer of the shares in the subsidiary is in whole, or in part, not a dividend in section ED 2B(6). 1 Sections 45B(3)(a)- 45BA, Income Tax Assessment Act 1936 (Aust).

6 14.2 Section ED 2B applies to a transfer of shares. Consideration should be given to whether this term is overly restrictive. We understand that the Australian legislation provides for a wider qualifying test. 2 It includes other demerger methods, and primarily focuses on the effect of the process, being: (i) (ii) the head entity ceases to own 80% of the ownership interests in the demerged subsidiary; and shareholders of the head entity own at least 80% of the ownership interests in the demerged subsidiary. For example, a demerger may occur via swamping, where the demerged subsidiary issues enough new shares in itself to owners of the head entity to bring about an effective transfer. This is explicitly caught by the Australian demerger regime. It is at least arguable that this method of demerger would not come within section ED 2B because there is no transfer of shares from the head entity Proposed section ED 2B(1)(c) requires that each shareholder receives the same proportion of shares in the demerged entity as he/she had in the head entity immediately before the share transfer. We consider that this test gives rise to the following technical issues: (a) (b) It is common that demergers will provide for a sale facility where certain shareholders are ineligible to participate in the demerger. It is not clear to us whether such a sale facility could be accommodated within section ED 2B(1)(c). If not, the result may be that the proposed amendment has little or no practical application. We submit that section ED 2B(1)(c) should be amended to disregard shares not able to be acquired by ineligible shareholders. That the number of shares issued in the new entity need might need to be rounded up or down to ensure a whole number of shares can be issued (or minimum shareholding sizes met). Again, we submit that section ED 2B(1)(c) should be amended to disregard differences in proportionate shareholding where this arises from such rounding. These issues could be resolved by following the Australian position: (i) amending the wording of section ED 2B(1)(c) to read each shareholder has a proportion of the shares in the subsidiary equal 2 Section (1) of the Income Tax Assessment Act 1997 (Aust)

7 to, or as nearly as practicable to, the proportion of the shareholder s shares in the splitting company 3 ; and/or (ii) (iii) allowing a de minimis threshold when applying section ED 2B(1)(c), to account for sale facilities and employee share schemes and other adjusting instruments; and/or for sale facilities, providing that shareholders (who are impeded by a foreign law from participating) are treated as continuing to hold their ownership interests at the time of the demerger for the equivalent proportionality test, even when the shares have been transferred to the sale facility for sale We submit that the reference in section ED 2B(1)(d) to a dividend under the Income Tax Assessment Act 1936 (Aust) is potentially uncertain. We understand that a dividend can arise for different purposes under the Australian legislation, with the result that a demerger dividend may not arise but a dividend could be regarded as arising for other purposes. We consider that explicit references in the proposed section to the operative provisions of the demerger regime in the Income Tax Assessment Act 1936 (Aust) would clarify the dividend that the proposed section is referring to. EMPLOYEE SHARE SCHEMES (CLAUSES 14, 41 AND 42) 15 Given the government s decision to promote the employee share scheme provisions in this Bill, we are broadly supportive of the proposals in the Bill on the basis that they provide greater clarity of the tax treatment of employee share schemes and should simplify the design and operation of such schemes. The proposals in relation to widely offered schemes are particularly welcome given the existing regime is outdated and inflexible in a number of respects. 16 Our submissions on the proposed employee share scheme rules are aimed at providing more certainty for taxpayers. Administrative or management services should be defined 17 The commentary on the Bill suggests that legal or accounting fees incurred in setting up an employee share scheme will be deductible as administrative or management services under section DV 27(4) or under section DV 28(2) for exempt share purchase schemes. But the Bill as currently drafted is not clear as to whether the costs of setting up a scheme and legal and accounting fees (incurred in setting up the scheme or on an 3 Section (2) Income Tax Assessment Act 1997 (Aust) 4 Section Income Tax Assessment Act 1997 (Aust).

8 ongoing basis) are covered by the term administrative or management services. Sections DV 27 and DV 28 should be clarified so that these costs are expressly deductible or administrative or management services should be broadly defined in section YA 1. The timing of an employer s deduction should be explicitly provided for in section DV The commentary on the Bill states that employers will be allowed a deduction equal in amount and timing to the income derived by an employee under the new rules. However, the timing of an employer s deduction is not made sufficiently clear by the proposed drafting of section DV 27; employers are currently required to trace through the definitions and associated sections of employee amount to determine the deduction amount, but this mechanic does not definitively state which period the deduction is actually available in. This could be remedied by simply adding the following to section DV 27: Timing of employer s deduction (10) The person is allowed a deduction for the period in which the employee amount (referred to in subsection 8(a)) arises. Section CE 7B should contain examples 19 We are concerned that the proposed rules may be difficult to apply in practice. In particular, the phrase "no real risk", as used in the definition of "share scheme taxing date in section CE 7B(1), is uncertain especially when it needs to be interpreted and applied by an employer on the establishment of a scheme on a forward-looking basis. We appreciate that it may be difficult to amend the wording of the section to deal with all potential situations. If it is not possible to do so, we submit that the legislation itself should contain examples clarifying the application of the provision (as is done in other parts of the Income Tax Act 2007 and other legislation). Examples contained in the legislation is preferable in our view to the alternative of relying on IRD commentary to support interpretation. PETROLEUM MINING DECOMMISSIONING (CLAUSES 113, 136 AND 172(8)) 20 We participated in the preparation and reviewed the final draft of the submissions made by the Petroleum Exploration and Production Association of New Zealand (PEPANZ) and support those submissions. In particular: 20.1 we support the proposal to replace the current spread-back mechanism for decommissioning losses with a refundable credit mechanism, to the extent that the proposed changes are consistent with the original policy intent and do not result in more adverse consequences for petroleum miners than what their position would have been if the current spread-back mechanism is retained;

9 20.2 we support the proposal to remove the requirement for decommissioning actions to be linked to the relinquishment of a permit. However, we submit that the proposed decommissioning definition should be amended to clarify, for the avoidance of doubt, that decommissioning includes the planning, management and execution of the physical acts of decommissioning; and 20.3 we submit that section RM 15(2) should be amended to achieve the policy intent that the provision applies to refunds arising from the proposed refundable tax credit.