We welcome today the issue of (yet another) Issues Paper from the New Zealand Inland Revenue. This is a mixed bag of possible sweeties, and we are just now delving into the bag to see what flavours we like.

And the first one we like is the review of distributions of capital gains by companies, whether during the life of the company or on liquidation.

If distributed during the life of the company (assuming not a Look Through Company or a Qualifying Company) the capital gain, which is otherwise not taxable in the company, suddenly becomes taxable to the shareholders. This is such an arbitrary rule that we advisors are always vigilant that this does not arise.

Secondly, “tainted” capital gains are even worse. These are nasty little things that can tax a company (or more specifically their shareholders) when the gain is distributed in the course of liquidation. The fact that a capital gain may have arisen from sale to an associated person causes great difficulties, as that can create a tax liability where one would not have arisen if the purchaser was not associated. Again this is an arbitrary rule, and yet a very common occurrence as business morph from one group of owners to another. Typically, this is where one set of shareholders wants out of the business and sale of the shares is not commercial or financially possible. This is also typically where businesses are handed down from generation to generation, farms held in trading companies, which are owned by Mum and Dad and the family trust, but are to be sold to the next generation.

But why stick to “closely held companies”, or more precisely why is the definition so narrow that what in your mind should be considered “closely held” is not because of the very nature of the definition?

We rail against the inadequacies and general unfairness of the existing law, it seems to no available, until perhaps now?  So let’s hope for changes that bring practical and realistic resolutions.

Now, what else is in that bag of sweets?

The comments in this paper are the personal opinion of the writer and are not necessarily the opinions of Shellock Consulting Ltd.