What is not a dividend?

CD 22 Returns of capital: off-market share cancellations
When this section applies

(1)

This section applies when a company pays an amount to a shareholder because of the off-market cancellation of a share in the company, other than on liquidation of the company.

Ordering rule

(2)

The amount is not a dividend to the extent to which it is less than or equal to the available subscribed capital per share calculated under the ordering rule, if—

(a)

1 of the bright line tests in subsection (3) is met; and

(b)

the company is not an unlisted trust that has chosen the slice rule for the share under subsection (4); and

(c)

the anti-avoidance rule in subsection (6) does not apply.

Bright line tests

(3)

The bright line tests referred to in subsection (2)(a) are as follows:

(a)

the cancellation is part of a pro rata cancellation that results in a fifteen percent capital reduction for the company:

(b)

the cancellation is part of a pro rata cancellation that results in a ten percent capital reduction for the company and the Commissioner has given a notice under subsection (8):

(c)

the cancellation is not part of a pro rata cancellation and results in the shareholder suffering a fifteen percent interest reduction:

(d)

the company is an unlisted trust and the cancellation is not part of a pro rata cancellation:

(e)

the share is a non-participating redeemable share.

Unlisted trusts choosing slice rule

(4)

If the company is an unlisted trust, it may issue a share on terms that the ordering rule does not apply and that instead the slice rule applies to the cancellation. If this happens, the amount paid is not a dividend to the extent to which it is less than or equal to the available subscribed capital per share calculated under the slice rule (but still subject to the anti-avoidance rule in subsection (6)).

Calculation concessions for foreign unlisted widely-held trusts

(5)

If a company is an unlisted widely-held trust not resident in New Zealand and a shareholder cannot obtain sufficient information to calculate the available subscribed capital per share under the ordering rule,—

(a)

the share is treated as if it were issued under subsection (4) on terms that the slice rule applies; and

(b)

the available subscribed capital under the slice rule is—

(i)

the amount paid for the issue of the share, if subparagraph (ii) does not apply; or

(ii)

the value of the money or property in which a beneficial interest would have vested in the shareholder had the share not been issued, if the share is a taxable bonus issue under paragraph (d) of the definition of the term.

Overriding anti-avoidance rule

(6)

Neither subsection (2) nor (4) excludes an amount paid by a company on cancellation of a share from being a dividend if any part of the payment is in lieu of the payment of a dividend.

Factors relevant in applying anti-avoidance rule

(7)

For the purposes of applying subsection (6), the following factors must be considered:

(a)

the nature and amount of dividends paid by the company before or after the cancellation; and

(b)

the issue of shares in the company after the cancellation; and

(c)

the expressed purpose or purposes of the cancellation; and

(d)

any other relevant factor.

Commissioner notifying view

(8)

If no part of a payment on cancellation of a share is in lieu of the payment of a dividend, the Commissioner may give notice to the company that subsection (6) does not apply to the cancellation.

Some definitions

(9)

In this section,—

counted associate means—

(a)

a person associated with the shareholder other than merely by virtue of being a relative; or

(b)

a spouse, civil union partner or de facto partner, or minor child of the shareholder, or a trustee of a trust under which a spouse, civil union partner or de facto partner, or minor child of the shareholder has benefited or is eligible to benefit

fifteen percent capital reduction means the circumstance in which the total amount paid by the company on account of the cancellation (or on account of any other pro rata cancellation of participating shares in the company occurring at the same time) is at least 15% of the market value of all participating shares in the company at the time the company first gave notice to shareholders of the cancellation

fifteen percent interest reduction means the circumstance in which, immediately after and as a result of the cancellation (together with any other cancellation of participating shares in the company occurring at the same time),—

(a)

the total direct voting interests in the company of the shareholder and any counted associates is 85% or less of their total direct voting interests in the company immediately before the cancellation; and

(b)

if at the time of the cancellation a market value circumstance exists, the total direct market value interests in the company of the shareholder and any counted associates is 85% or less of their total direct market value interests immediately before the cancellation

non-participating redeemable share means a share that meets the following conditions

(a)

the share is issued, under the company’s constitution or establishing legislation, on terms that involve the share being required or allowed to be redeemed or repaid before the company is liquidated; and

(b)

the share is—

(i)

a redeemable share under section 68 of the Companies Act 1993 or an equivalent provision of foreign law; or

(ii)

issued under 1 of New Zealand’s Acts relating to co-operative companies; or

(iii)

subject to sections FA 2 (Recharacterisation of certain debentures) and FZ 1 (Treatment of interest payable under debentures issued before certain date) or section FA 2B(2) (Stapled debt securities); or

(iv)

a unit in a unit trust that is not a widely-held trust; and

(c)

the share is either a fixed-rate share or a share for which the amount payable on cancellation is no more than the available subscribed capital per share calculated under the slice rule; and

(d)

the shareholder does not have shareholder decision-making rights in relation to the share except—

(i)

a protective right; or

(ii)

if the company is subject to 1 of New Zealand’s Acts relating to co-operative companies

participating share means a share that is not a non-participating redeemable share

protective right means a shareholder decision-making right that—

(a)

arises only if the shareholder’s position may be altered to the shareholder’s detriment or if the company defaults on its obligations under the terms of the share; and

(b)

is granted to the shareholder only to assist the shareholder to prevent the alteration or to remedy the default; and

(c)

when the share is issued is not expected to arise

ten percent capital reduction means the circumstance in which the total amount paid by the company on account of the cancellation, or paid on account of any other pro rata cancellation of participating shares in the company occurring at the same time, is at least 10% of the market value of all participating shares in the company at the time the company first gave notice to shareholders of the cancellation

unlisted trust means a unit trust or group investment fund, the units or interests in which are not quoted on the official list of a recognised exchange.

Defined in this Act: amount, associated person, available subscribed capital, cancellation, Commissioner, company, co-operative company, counted associate, direct market value interest, direct voting interest, dividend, fifteen percent capital reduction, fifteen percent interest reduction, fixed-rate share, group investment fund, liquidation, market value circumstance, New Zealand, non-participating redeemable share, notice, off-market cancellation, ordering rule, participating share, pay, pro rata cancellation, protective right, recognised exchange, relative, resident in New Zealand, share, shareholder, shareholder decision-making right, slice rule, taxable bonus issue, ten percent capital reduction, trustee, unit trust, unlisted trust, unlisted widely-held trust, widely-held trust

Compare: 2004 No 35 s CD 14

Section CD 22(9) counted associate paragraph (b): amended, on 1 April 2010 (applying for the 2010–11 and later income years), by section 15(1)(a) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).

Section CD 22(9) non-participating redeemable share paragraph (b)(iii): amended (with effect on 1 April 2008), on 6 October 2009, by section 15(1)(b) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).