OPTIONAL DISTRIBUTIONS UNDER NEW ZEALAND’S IMPUTATION AND RESIDENT WITHHOLDING TAX SYSTEMS
By James Murray
This paper reviews the taxation of optional distributions in New Zealand. Three types of optional dividend plan have been used: bonus election plans, dividend reinvestment plans and profit distribution plans. This paper also looks at share repurchases which are similar to optional dividends as they also give shareholders a choice between cash and shares. Originally each type of optional dividend was taxed according to its component transactions, but their taxation was subsequently aligned due to their economic similarity and to minimise opportunities for dividend streaming. However, although share repurchases are similar they are taxed differently, potentially allowing dividend streaming. Dividend reinvestment plans are the most common form of optional dividend used in New Zealand, despite profit distribution plans providing much higher levels of reinvestment. This paper identifies issues with calculating resident withholding tax (RWT) on taxable bonus issues and the misalignment of company, RWT and personal tax rates as possible reasons why companies are not using profit distribution plans.