Potential changes to dividend and attribution rules

If you have a trust or a closely held company, this will affect you 

With accountants buried deep in the March rush to get client’s tax returns filed by 31 March 2022, now is not the time for Tax Policy to release a 54 page discussion document with only a six week submission period, especially when the topic is of material significance to a wide group of taxpayers. Or depending on where you sit, perhaps it is the right time? 

Titled, “Dividend integrity and personal services income attribution” you would be forgiven for it not immediately grabbing your attention. Essentially the document is looking at proposals that would limit the ability of individuals to circumvent the top personal income tax rates by diverting their income through entities taxed at a lower rate. 

The focus is mostly on closely-held companies and trusts used by high income individuals. 

The document is proposing:  

• That a sale of shares in a company by the controlling shareholder is treated as a dividend to the shareholder to the extent that the company (and its subsidiaries) has retained earnings
   
• That companies maintain a record of their available subscribed capital and net capital gains so these amounts can be accurately calculated at the time of any share cancellation or liquidation
   
• That the ‘80 percent one buyer’ test for the personal services attribution rule be removed.  

This is just the first of three tranches that the Government is intending to work through. Tranche two will look at trust integrity and company income retention issues, while tranche three will look at integrity issues with the taxation of portfolio investment income. Details on tranches two and three are not expected until Tax Policy have reviewed the data from the 2022 income year tax returns, which incidentally will contain significantly more information under the new trust reporting requirements.  

The closing date for submissions on the above proposals is only weeks away, 29 April 2022. We encourage you to take the time to read through the discussion document and submit your views as the outcome will likely affect you in years to come. 

Please contact your Nexia advisor if you would like to discuss this further.