Company is defined as any body corporate or other entity that has a legal personality or existence distinct from those of its members, whether incorporated or created in New Zealand, or elsewhere. It includes a unit trust, public or local authority, or Maori Authority (YA1).
Company are further categorised for tax purpose as follows:
· Widely-held company: a company has 25 shareholders (associated shareholders counted as one) or more; and it is not a close-held company.
· Close company: a company that has five or fewer natural persons (associated persons counted as one) who either hold voting interests, or hold market value interests in the company of more than 50%.
· Closely-held company: a company that has five or fewer persons (associated persons counted as one) who hold direct voting interests, or hold direct market value interests in the company is more than 50%.
· Limited Attribution Company: any building society, co-operative company, listed company, widely-held company, or limited attribution foreign company.
· Limited attribution foreign company: a non-resident company or a company resident in New Zealand that, under a DTA, is treated as non-resident company and is not a closely-held company.
· Special corporate entity: any public or local authority, any state-owned enterprise, any statutory producer board, any statutory body established by Act of Parliament that dose issue shares, any life insurance fund, any group investment fund, any Crown research institute, or any Crown health enterprise.
· Qualifying and loss attributing qualifying company: see below
· Look through company: see below
Company is taxed on its income at a flat rate of 28%.
1. Company expenses: the general rule for allowable deduction is the expense of loss must have been incurred in deriving income, or incurred in the course of carrying on the company for the purpose of deriving income.
Interest incurred by most companies is fully deductible irrespective of what the funds borrowed were used for. This does not apply for qualifying companies.
Gifts and donations are also allowed for deduction from 1 April 2008.
2. Company losses: company can carry forward loss as long as the continuity of shareholding test is met, which means 49% of company share ownerships remain unchanged.
3. Company returns: companies must file an income tax return (IR4) for every tax year. The worldwide income of a resident company is taxable. If the company is a non-resident, only the New Zealand-sourced income is taxable.
A dividend derived by a taxpayer is the income of the taxpayer and taxable. The concept underlying what a dividend is required that:
· A ‘transfer of value’ must take place from the company to a person; and
· The cause of the transfer is a shareholding relationship in the company; and
· None of the exclusions in CD22 – CD36 apply to the transfer
· CD38 – CD44 apply in calculating the dividend amount and CD45 – CD 53 apply for CFC repatriations.
1. What is ‘Transfer of value’?
a. All sums in money distributed to shareholders are dividends. It also includes sums that are credited to the shareholders’ current account with the company. But it does not include drawings from a credit balanced current account.
b. Acquire property from a shareholder at above market value. The excess amount is dividend. Example: a company purchased a land from a shareholder for $400,000. The market value of the land is $350,000. The excess amount $50,000 is dividend to the shareholder.
c. Transfer property to a shareholder at below market value. The different amount is dividend. Example: a company transferred a land to a shareholder for $350,000. The market value of the land is $400,000. The different amount $50,000 is dividend to the shareholder.
d. Forgiveness of debt is a dividend to the shareholder.
2. What is not a dividend?
a. An on-market repurchase of shares through Stock Exchange
b. An off-market repurchase of shares meeting certain requirements
c. Treasury stock repurchased by the company
d. A distribution of subscribed capital gains on liquidation of the company