Revenue Alert warns that some share sales may constitute dividend avoidance or dividend stripping
Inland Revenue has issued a Revenue Alert, RA 18/01, advising that some share sales to related entities may be
considered tax avoidance in the form of dividend stripping.
Revenue Alerts are issued by the Commissioner of Inland Revenue to provide information and guidance about significant
current tax planning issues. Inland Revenue spokesperson Graham Tubb says the department is increasingly seeing
corporate distributions effectively structured as sales of shares to related persons in situations where there is little
or no underlying economic change in ownership or control, a practice called dividend stripping.
“These are transactions which transfer value to a shareholder but the way they are being structured makes it look like
it’s just a sale to, for example, a company in which the seller or close associate also has a significant direct or
indirect shareholding,” Mr Tubb says. “The effect is that the seller in reality retains ownership of the interest which
is transferred.
“So if the seller’s pre- and post-sale ownership is effectively the same, but the seller receives value from the share
sale, the greater the likelihood that the transaction could be treated as a dividend by reason of the tax avoidance
rules.”
Where Inland Revenue considers that the sale proceeds, debt repayments or other value transferred are in substance a
dividend, the shareholder will be assessed on the amount of the dividend. Resident or non-resident withholding tax,
along with shortfall penalties, may also be applied. If a taxpayer has concerns about any such transactions as a result
of this Revenue Alert, they should seek professional advice and potentially consider making a voluntary disclosure to
Inland Revenue, Mr Tubb says.
“I would certainly encourage anyone for whom this may apply to contact us.”
The Revenue Alert can be viewed at http://www.ird.govt.nz/technical-tax/revenue-alerts/revenue-alert-ra1801.html