Are you thinking of changing your company’s shareholding? Be aware of the tax consequences.
Changing the shareholding of a company can have tax consequences. What those tax consequences are will depend on the tax status of the company.
Where your company has no special tax status (a standard company), the concern is around preserving the company’s tax losses, if any, and imputation credits. Tax law requires a company to maintain certain levels of continuity of ownership to use its tax losses and to allow it to attach imputations credits to dividends it pays to shareholders. When a company’s shareholding changes too much, its tax losses and imputation credits will be lost, resulting in increased taxation for the company and/or shareholders.
When your company has a special tax status (a qualifying company or look-through company), changing the shareholding in the company could result in the loss of that status or a tax liability for the shareholder.
Recent changes to the rules
Governing qualifying companies mean that changes in the company’s shareholdings can result in the company losing its qualifying company status. There is now a requirement for qualifying companies to maintain continuity of ownership to remain a qualifying company. Losing qualifying company status will mean the company loses the benefits of that regime, such as being able to pay tax-exempt dividends, and may lose some or all of its imputation credits. Even if the continuity requirement is not breached, there are elections that may need to be filed with IRD to ensure the company remains a qualifying company.
When your company is a look-through company, tax law treats a change in the shareholding of the company as the shareholder disposing of an interest in the assets and liabilities of the company proportionate to the shareholder’s shareholding in the company. For example, if you sell 10% of the shares in the company you are treated as selling 10% of the company’s assets and liabilities. This can result in the shareholder having taxable income when the deemed sale of the assets results in taxable income due to the company’s assets, including trading stock, livestock, depreciable property or other revenue producing assets.
Before changing the shareholding of your company, talk to your Findex adviser to ensure the income tax consequences are worked through and a strategy for mitigating them is put in place.