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Government caves in to shareholder lobbying on taxation of demerged shares

Saturday 3rd September 2016

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The New Zealand Shareholders’ Association has succeeded in its dogged pursuit of a legislative change so shareholders don’t get taxed on shares of demerged companies.

Revenue Minister Michael Woodhouse has agreed to put the demerger issue onto the government’s draft tax policy programme and has given it high priority, chairman John Hawkins told those attending the association’s annual meeting in Auckland.  

Former minister Todd McClay had said previously that while there was merit in the argument that the taxation of shares in demerged companies was unfair, Inland Revenue didn’t have the resources to address the problem which required a legislative change.

It’s an issue that not only impacts individual shareholders but also those in managed funds and some KiwiSaver funds. “Potentially there’s a very large pool of around 1.6 million New Zealanders,” Hawkins said.

The current taxation rule is out of step with how Australian shareholders are treated when a company splits its shares. Hawkins said Kiwi shareholders don’t mind paying tax on dividends but there was no reason they should pay tax when it’s purely a split of their existing capital.

The shareholders' association refused to give up after the initial response from government and it’s lobbying has now paid off. The demerger question will need to be rubber-stamped by a parliamentary select committee and all going well, should be included in the omnibus tax bill due to go before the parliament early next year, Hawkins said.

Given the time it will take to go through the parliamentary processes, Hawkins said the association wants any legislative change back-dated to April 1, 2016, as it highlighted the issue and a potential quick-fix to the government more than a year ago.

Two examples of company deals that impacted shareholders during the year because of the tax issue were NZME and potentially Diligent Corp, he said.

Investors putting their money into the country’s productive assets rather than simply taking untaxed gains on the property market should not be “unfairly treated”, Hawkins said.

He also slammed the corporate governance of three companies the association had actively lobbied this year: Rakon, where it’s seeking the appointment of two “truly” independent directors at the company’s annual meeting this month; Wynyard Group, which came close to running out of funds when it failed to raise money earlier this year; and Veritas Investments, whose recent financial results were deeply disappointing to shareholders.

The association, which now has about 1,200 members, had its annual income of $244,000 significantly bolstered by corporate membership. It started corporate membership two years ago and the number has now grown to 16 companies, with three being added in the past year. Corporate members paid a total $161,000 in fees this year, double the amount a year ago.

Hawkins said corporate membership was by invitation only to companies that the association considered had the best corporate governance. He wouldn't comment on whether any company had turned down an invitation to join.

One shareholder asked whether “Chinese walls” were considered when the corporate membership class was established. A blind trust structure had initially been looked at, but the size and nature of the New Zealand markets meant it wasn’t practical to go down that path, the association said.

Hawkins said the heavy reliance on corporate funds doesn’t mean the association would be financially troubled in the unlikely event all 16 members left at once as it would simply “slice and dice” its budget accordingly.

Corporate membership doesn’t mean they are immune from the association criticising or lobbying that company if they deserve it, though to date none have, he said.

Corporate members include many of the biggest listed companies including Air New Zealand, Mercury, Ryman Healthcare, Fisher & Paykel Healthcare. Several representatives from the corporate membership were speakers at today's AGM.

BusinessDesk.co.nz

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