8.3 23%20%26%2024%20Company%20Taxation%202009.ppt

8.3 23%20%26%2024%20Company%20Taxation%202009.ppt - ACIS...

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Unformatted text preview: ACIS 254: ACIS Introduction to Taxation Introduction Lectures 23 & 24 Company Taxation Michael Gousmett Department of Accounting & Department Information Systems, University of Canterbury, Christchurch Christchurch 1 Outline of Lecture: Losses General losses General Rental losses Rental Company losses Company Losses and company groups Losses Imputation Overview & Main Features Imputation Credit Accounts Transitional provisions Benchmark ratio Compliance rules and problems Bonus share issues 2 Outline of Lecture (continued) Foreign Dividend Payments Foreign Investor Tax Credits (FITC) Resident Withholding Tax Rates, exempt items, Certificates of Rates, Exemption, Exemption, Payment of RWT, refunds Reconciliation and disclosure. Non-resident Withholding Tax Non-resident Background, rates, imposition, payments, approved issuer levy, final vs. minimum tax 3 Topic 1: Losses - Introduction • S. DA 1(1) ITA 2007: loss is single expense or loss. • Net loss for a year from a particular source which Net should be set-off against income from other sources in same year or carried forward to a subsequent year. forward General: A loss is ascertained in same General: manner as net income using the normal rules for income and deductions (s. IA 1 rules – IA 4 ITA 2007). IA (Refer to earlier notes on income and deductions) (Refer 4 • Losses – Introduction (continued) • Section 33 Tax Administration Act 1994 – requires a Section • • • • filing taxpayer to furnish an annual return of income during the following year. during This return must contain a notice of self assessment This required to be made under s. 92 TAA 1994. required Process of self assessment was legislated from the Process 2003/03 income year. 2003/03 The obligation to file a return is not dependent on The taxpayer making a profit. taxpayer A taxpayer carrying on a business making a loss must taxpayer still file a return. still 5 Losses - Introduction • Part VI (Assessments) of the TAA 1994 gives Part the CIR the statutory power to make assessments and determinations. assessments • Use of these powers subject to judicial Use scrutiny and litigation. scrutiny • S. 92 TAA 1994 CIR determines loss for year, S. or amount of loss to be carried forward. Taxpayer receives notice of determination of loss - s 111 TAA. loss 6 Losses • Right to object to this notice as if it were a notice of Right • • • • • assessment. assessment. Loss is set off first against net income of the same year. Loss To extent cannot be offset in the year of loss, balance To carried forward & deducted from net income of next income year. income Losses incurred in two or more income years carried Losses forward, deducted / set off in order they were incurred (FIFO) (FIFO) A refund of tax cannot be made in respect of an refund assessment beyond 8 years from end of year assessment was made. was A trustee cannot carry forward the loss of a deceased trustee person beyond the return of income to the date of death. person 7 Rental losses • Rental losses are deductible if correct statutory Rental • • • provisions followed. provisions Contentious area – Commissioner’s stance was to Contentious only allow a deduction for expenditure to the extent of the rental income up to June 1992. of Earlier cases going against the Commissioner. Commissioner accepts a full deduction for all Commissioner expenditure, including interest for the period, even if this results in a net loss for the period. this Eggers – Pacific Rendezvous Ltd v CIR (1986) (CA), Eggers v CIR (1988) (CA) and CIR v Brierley (1990) (CA) CIR Court – Court of Appeal permitted interest deductibility. 8 Company Losses • Before 1/4/93, company losses carried forward and Before • • • • offset - 40% continuity of shareholding test; measured start of loss year & end of offset year. start 1/4/93, 49% continuity of voting rights of 1/4/93, shareholders being maintained continuously. Previously: aggregate rights to vote, profit Previously: entitlement and return of capital. Rules now simpler: loss continuity calculation Rules for shareholder’s percentage voting interests in equity. Voting interests calculated as average of each Voting shareholder’s decision making rights. shareholder’s 9 Company Losses (continued) • Shareholder’s minimum voting interest Shareholder’s • % in period is aggregated, & calculated as lowest common multiple. as Exceptions: 1. Concession for small shareholdings: all rights under 10% may be Concession aggregated to count as one shareholding. aggregated 2. No need to trace through certain entities called limited attribution 2. companies if their interest is less than 50%. (Prevents excessive tracing through of shareholders). (Prevents 3. No need to trace through a shareholder company to the extent its No shareholders hold less than 10% of company. shareholders 10 10 Losses & Company Groups • Designed to restrict ability of companies which Designed • • • are not members of loss source group from benefiting from those tax losses. At all time during the year in which the loss At was incurred and all succeeding years up to and including the year the loss is set-off; including Loss company and other company must be Loss commonly owned by at least 66% (previously 66 2/3%). 66 Important to understand concepts behind Important current rules. current 11 11 • Significant tax case about offsetting tax losses within a group of Significant companies companies (We will also discuss this case in the tax avoidance lectures) (We CIR v Challenge Corporation Limited [1986] (PC) • Arrangement involving the purchase of shares of two bankrupt Arrangement • • • • • companies in order to take advantage of their accumulated losses. companies Challenge group anticipated a substantial profit for the income Challenge year about to end on 31 March 1978. year Challenge entered into arrangements to purchase two companies Challenge with accumulated losses. with Timing for loss offset was previously to be in same group for the Timing relevant year of loss (at 31 March). relevant An offset was valid even if joined on 30 March in the year of loss Current rules (since 1993) companies must be members of the Current same group from beginning of the year of loss to the end of the year of offset at all times. year 12 12 Losses & Company Groups (continued) • Where common interest is 100% companies will be Where treated as wholly owned group. treated Allows – Allows dividends between companies in the group to be exempt (s CW 10 ITA 2007). exempt • The common grouping of greater than 66% by companies allows a than loss offset between companies loss in the group in the same year. in Achieved by subvention payment Achieved or election. or Restricted to lesser of profit company’s profit or loss company’s loss. company’s 13 13 Topic 2: Imputation • Imputation first mentioned in 1985, confirmed as policy Imputation in 1987 budget, with consultative document in 1987. • Imputation regime introduced from 1 April 1988 to Imputation effectively eliminate double taxation. effectively • Separate tax status of shareholders & companies Separate maintained; corporate profits taxed to company & dividends taxed to shareholders. dividends • Individuals receiving dividends are allowed a credit for Individuals tax paid at corporate level. Companies ‘impute’ credits for the income tax the company has already paid. 14 14 Objectives: Objectives: 1. Income earned by company taxed at marginal rates of shareholders (the owner's of capital). shareholders 2. Minimises administrative & compliance costs of regime. When shareholders complete their income tax returns they include in their gross income not only the dividend they receive from the company, but also the imputation credit attached to it. attached A shareholder can claim a credit against their income tax shareholder liability for the amount of the imputation credit attached to the dividend. (see Fiasco limited example in lecture notes). dividend. Note: Imputation credits are given for New Zealand tax, not for foreign taxes paid. Cash refunds are not given for surplus imputation credits. imputation 15 15 Imputation (continued) The Imputation Credit Account • Memorandum account only - not within the double entry Memorandum • • • • • system. Keeps track of tax company has paid & credits attached Keeps to dividends paid to shareholders. to Every New Zealand resident company must keep an Every Imputation Credit Account. Imputation Period covered is from 1 April to 31 March regardless of Period company’s balance date – this is called the imputation year. year. A company with a balance date different to 31 March company cannot align its imputation year with accounting year. cannot ICA opening balance is the same as closing balance of ICA the preceding imputation year. the 16 16 Credit and debit entries • Credits s. OB 4 to OB 16 ITA 2007 include: Credits include: 1. Provisional/terminal tax; not FBT, GST, penalty 1. taxes. taxes. 2. Credits received from other companies. • Debits s. OB 33 to OB 54 ITA 2007 include: Debits include: 1. Allocations to distributions, not on dividend 1. declaration. declaration. 2. Refunds of income tax limited to credit balance in Refunds ICA at previous 31 March. Excess credited to future tax. tax. 3. Technical adjustments: loss of shareholder continuity. 17 17 • • Balance date always 31 March; can go into debit during the year, but Balance • • not in debit at 31/3. not If debit balance 31 March, must be repaid by 20 June plus penalty. Credit balance carried forward if 66% commonality of shareholders Credit from one imputation year to another. from 18 18 ICA Example ICA Example Debit $ Credit $ Opening Balance Provisional tax paid 9,000 Provisional 9,000 Dividend received Dividend $4,000 x 30/70 1,714 Tax refund 1,500 Dividend paid Dividend $16,000 x 30/70 6,857 Balance 31 March Balance $ 2,000CR 11,000CR 12,714CR 11,214CR 4,357CR 4,357CR Allocation Rules • Prevent allocating credits to selected groups: • For net dividend of $70, maximum credit of $30 may For • • • • • be attached. Maximum imputation ratio of 30/70. First distribution in year sets benchmark ratio which First all later distributions should apply. Can change ratio if declaration form is filed with the Can IRD beforehand. IRD If do not use benchmark and no form is filed, all later If dividends have imputation ratio equal to highest one for year. Penalty of deemed debit to ICA according to a Penalty formula but shareholders do not receive any credits. formula With higher marginal tax rate (e.g. 33 % or 39%), With cannot fully impute dividends. cannot 19 19 • Companies use reduced rate of 30% from start of Companies • • • • • • Transitional Provisions 2008/09 income year. 2008/09 Additional tax will have to be paid at the shareholder Additional level. level. Companies will benefit if profits are retained and Companies reinvested in the company. reinvested Maximum imputation credit ratio is set equal to the Maximum company tax rate. company Dividends usually paid out in arrears – transitional Dividends period allows for profits taxed at 33% to be passed through to shareholders with credit for higher rate of tax. tax. Transitional period ends 31 March 2010. Companies will have to maintain two ‘buckets’ of Companies imputation credits during the transitional period. 20 20 Compliance Rules • • • • • These rules are onerous: Annual imputation return s. 69 TAA 1994 Company dividend statement, shareholder Company dividend statement must be filed. dividend In some cases an annual foreign dividend payment In account return filed (FDPA), see s. 71 TAA 1994. account Company Dividend Statement: s. 67 TAA 1994, Company must be made at the time of a declaration of a dividend. 21 21 Compliance Rules (continued) • Shareholder Dividend Statements: s. 29 TAA 1994, Shareholder must be sent to shareholders when dividends paid. • To receive imputation credit in tax return, shareholder must be able to produce Shareholder Dividend Statement upon request by Inland Revenue. Dividend balance, with excess able to be offset against future income tax liabilities. income 22 22 • Refund of tax limited to previous 31 March credit Refund Bonus Share Issues • Bonus issues do not in theory increase wealth, argument Bonus that should not be taxed. • Two types of bonus issues: 1. Taxable bonus issue shares received 1. received from another company with credits attached - a credit to the ICA. • Taxable bonus shares issued appear as a debit. Taxable issued • Same allocation rules for cash dividends apply. 2. Non-taxable bonus issues retain pre-capitalisation status 2. - at the time of issue have no tax consequences. at 23 23 Foreign Dividend Payments • Formerly ‘dividend withholding payments’. • Foreign source dividends received by New Zealand resident Foreign • • • • • companies are subject to a withholding payment at 30%. Rationale: taxable if received by individual shareholder – allows Rationale: Government to get the revenue earlier. Government In calculating Foreign Dividend Payment (FDP): consider any In foreign withholding tax deducted at source. foreign Balance of FDP credited to ICA or FDP Account (FDPA) if Balance company chooses. Credit balance in FDPA at 31 March: transfer to ICA Reason: individual shareholders get cash refunds for unused Reason: FDPA credits, not unused ICA credits. 24 24 Foreign Dividend Payments (continued) • Foreign tax paid is taken into Foreign • • • account in calculation of FDPA liability Where non-resident shareholders Where are involved, imputation credits cannot be passed on. Instead: NRWT must be deducted Instead: from dividend unless the new international tax regime applies. international Trans-Tasman Imputation – Trans-Tasman groups, mutual franking and imputation credits recognition. imputation 25 25 Unused Credits & Other Issues • Companies with tax loss can reduce their tax loss by the Companies • • • FDP liability / 0.30. Credits received by a non corporate shareholder in tax Credits loss situation will be added to the loss: unutilised credits / 0.30 = addition to loss. 0.30 If NRWT owing by foreign shareholder, FDP credits If refunded first set off against NRWT, then refunded. refunded Non-residents can get refunds of FDP credits but not Non-residents imputation credits – if a company receiving foreign dividends has a large number of foreign shareholders – most likely will set up Foreign Dividend Payment Account (FDPA). Account 26 26 Foreign Investor Tax Credit • New Zealand resident investors relieved of double New • • • • taxation in respect of dividend distributions from New Zealand companies. New The benefits of imputation did not extend to nonresident investors. Widespread criticism of continued imposition of Widespread NRWT on fully imputed dividends. NRWT FITC regime effectively eliminates the monetary FITC effect of NRWT on dividends paid to foreign shareholders where, and to extent that, the dividend is fully imputed. fully Achieved by payment of a ‘supplementary dividend’. Achieved 27 27 Other Issues: • Trans-Tasman imputation • Amalgamations & Share Repurchases – ACIS Amalgamations 354 354 28 28 Topic 4: Resident Withholding Tax • Withholding tax deducted from dividends (when Withholding • • • • • • insufficient imputation credits) and interest income, deducted before the income is derived/received. deducted Deducted at rate of 19.5% on interest and 33% on Deducted dividends, unless a certificate of exemption is held. dividends, 33% on interest if over $38,000 from 1/4/99 if requested. 39% on interest if over $60,000 from 1/4/00 if requested. Non-declaration: 39% from 1/4/2000 – if no IRD number. Certificates of exemption available for many recipients of Certificates withholding income, including unincorporated bodies and non-profit organisations. non-profit Payment to CIR, with reconciliation statements and details Payment supplied to recipient. 29 29 Resident Withholding Tax (continued) • A person who makes a payment of ‘resident passive person • income’ must withhold an amount from the payment under the RWT rules. under Resident passive income consists of all interest and Resident dividends other than: dividends Exempt – Exempt interest (defined in YA 1) and includes debts entered into under generally accepted commercial practice for the purchase of goods and services, interest payable under hire purchase agreements and several other items. 30 30 • Levied on non-resident withholding income sourced Levied • • • • in New Zealand in 30% on dividends and 15% on other forms (interest 30% and royalties) unless reduced by a tax treaty (15% dividends & 10% interest and royalties) dividends Some exclusions exist – do not need to know these. Approved Issuer Levy - alternative to simplify Approved process - with lower rate of 2% (tax deductible) process NRWT is a final tax on dividends and certain NRWT royalties, but only a minimum tax on other royalties and associated person transactions. and Topic 5: Non-Resident Topic Withholding Tax Withholding 31 31 • Read NZT 2009 chapter references in Read • • • • • • notes. notes. Losses: Company losses - 49% continuity Company requirement requirement Based on minimum voting interests Based Notional single shareholder concession Limitations on tracing in companies The grouping requirements changed The from 1/4/92. from 32 32 Key Points: Key Points (continued): • Imputation: • Designed to tax income earned through company at Designed • • • • • • marginal tax rate of shareholder: no double taxation. marginal Imputation is a partial integrated company tax Imputation system. system. ICA records credits & debits; must not be in debit ICA 31/3. 31/3. Allocation rules are designed to deter avoidance. Benchmark ratio Transitional provisions – two ‘buckets’ until 2010. Foreign Dividend Payment on foreign dividends Foreign normally kept in separate account: FDPA. normally 33 33 Key Points (continued): • • • • • • • • • • Foreign Investor Tax Credits (FITC) Resident Withholding Tax Deducted at source from interest and dividends. Rates Certificates of exemption Non-Resident Withholding Tax Imposed on non-resident withholding income (interest, Imposed dividends, royalties) – derived by a person who is regarded as not resident in New Zealand. regarded Rates Approved Issuer Levy Final vs. minimum tax 34 34 © Alistair Hodson 2009 ...
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This note was uploaded on 12/23/2009 for the course BCOM ACIS 254 taught by Professor Alistairhodson during the Spring '09 term at Canterbury.

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