Tax force recommends dividend rebate

Press, 17 April 1982, Page 21

Tax force recommends dividend rebate

PA Wellington The current distinction between capital (tax-free) and revenue (taxable) dividend distributions should not be continued, the McCaw Task Force on Tax Reform said in its report. The report said that for tax purposes restrictions should be placed on a company’s ability to nominate the source of its dividend distributions. It said that “while the current tax-free distribution procedures might be excused as ‘ad hoc’ to alleviate the effect of taxing both company profits and shareholders’ payments (in effect a double taxation) the ability to make use of such mechanisms was not available to all companies and shareholders in an equitable manner.”

As an alternative the Tax Force recommended a simple dividend rebate to all shareholders of dividends, resident here. - It said a dividend rebate would be relatively simple to determine, being based on a fixed percentage of dividends received by an individual, and it was compatible with the general system of rebates currently given for various reasons to individual taxpayers. The value of the rebate being independent of the marginal tax rate of the individual was of equal benefit to taxpayers with low or high taxable incomes, the task force said.

The report said a figure between 15 and 20 per cent of dividends received would be appropriate. "The present exemption of $2OO would need to be limited to interest only.” The task force noted that the overnight introduction of a change in the tax treatment of company distributions may cause problems for the sharemarket. "It also appears that some companies may have already anticipated a change in the tax rules in this area, and have brought forward their dividend payment dates or made special distributions from currently tax-free sources in an endeavour to avoid the effect of the possible legislative change if this were applied in the current income year." The revenue lost from the

tax-free distribution of "capital" dividends was estimated by the task force at about $35 million in 1980-81 terms.

With all dividends subjected to tax, the offsetting revenue of the proposed rebate has been estimated at $26 million for a 20 per cent rebate on dividend payments. The task force proposed that, the tax payable on bonus issues (of shares) of 17.5 c in the dollar (paid by the company) should be abolished.- because it was of unsound principle and inhibited the free and proper operation of the capital market.

"The current revenue cost of this proposal is estimated at less than $4 million a year. “The bonus tax should be replaced with a provision for tax to be levied upon any reduction in capital made within 10 years after a bonus issue,” the report concluded. The report said: “It is sometimes argued that the making of a bonus issue is of benefit to shareholders, in that the combined market value of the head shares and bonus shares is in some cases greater than that of the head shares alone, before the ■bonus issue."

"The principal reason for this is that the issue of bonus shares is a formalised way in which directors signal their confidence in the company’s ability to sustain an increased dividend payout in the long term.”