'Wasteful complexity’ in new tax proposal

Press, 28 June 1989, Page 37

'Wasteful complexity’ in new tax proposal

Unheralded minor changes to the recently released Income Tax Bill (No. 8) will, if they become law, introduce unnecessary and wasteful complexities into tax legislation and may see New Zealand in breach of international tax treaties, the accountancy firm, Arthur Young, says.

The national director of tax with Arthur Young, Mr Michael Stanley, said changes to the bill extended the concept of fringe benefit tax (F.8.T.) payments on interest-free loans. “Interest-free loans to employee shareholders, who are not major shareholders have been subject to F.B.T. for some time,” Mr Stanley told an Auckland tax conference. “As expected, the new changes extend that concept to cover major shareholder employees and to all individual shareholders, effective from October, 1989.” In addition, the proposals would extend the act’s jurisdiction to cover inter-company loans,, back-dated to April 1, 1989, he said. The changes provided that in respect of inter-company loans, deemed interest, and forgiveness of debt will be treated as dividends received, and the latter taxed in the shareholder company’s hands. The new legislation would have only a minimal impact on domestic transactions

because of resident withholding tax exemptions, but it would severely affect cross border transactions, Mr Stanley said. He cited the example of a New Zealand subsidiary which had made a loan to its overseas parent that was interest free. In such a case, it would be deemed that the overseas company had received a dividend of 15 per cent or $l5O per $lOOO. “The New Zealand non-resident withholding tax on this dividend could be up to 30 per cent, or $45 per $lOOO of loan,” Mr Stanley said.

“But in normal circumstances, an overseas company receiving a dividend taxable at its home base would be able to use the nonresident withholding tax paid in New Zealand as a credit against its domestic liability. “However, as no dividend has actually been paid, the overseas company will not have a domestic liability to pay tax, making a New Zealand tax credit useless and giving rise to a situation which will, in many circumstances, be contrary to the philosophy of established tax treaties,” Mr Stanley said.

If the debt concerned in this case was forgiven, the non-resident withholding tax liability would be $3OO per $lOOO. Mr Stanley said the Government appeared to be relegislating in a more complex fashion.