Tax Updates: 6 October 2025

Welcome to this week’s review of tax issues where Richard comments on what’s been happening in the world of tax over the past week. If you have a question or would like a second opinion on any national or international tax issues, please contact Richard via email at richard@gilshep.co.nz.

Is it really a dividend?

I’ve been a little slow to get to this item (the interpretation statement (IS) was released in mid-September), however, as the saying goes, better late than never!

The reference is IS 25/19, which is titled “Income Tax – Whether an off-market share cancellation is made in lieu of the payment of a dividend.” For those of you who have been around the block a few times like me, you have probably encountered numerous scenarios where your client asked, if the company reacquires some of their shares, can the amount paid to them be tax-free?

IS 25/19 attempts to provide some guidance in this regard, setting out the factors to be considered in determining whether an off-market cancellation of shares is made in lieu of the payment of a dividend. If so, a taxable dividend will arise.

I always take the starting position that if there is a transaction involving a company, its shareholders (or their associates), and a transfer of value between the two, then there’s a potential dividend issue in play, unless I can find an exclusion.

When it comes to an off-market cancellation of shares (so think private company buying back some of its shares on issue), the relevant provision is section CD 22. In this regard, to qualify for the exclusion, you need to tick all of the following three boxes:

• one of the bright line tests in s CD 22(3) is met;

• there is sufficient available subscribed capital (ASC) per share calculated in accordance with s CD 22(2) or CD 22(4) (whichever is applicable); and,

• no part of the payment is made in lieu of the payment of a dividend, i.e. the anti-avoidance rule does not apply.

And we are all well aware that, irrespective of the conclusion we may reach, the Commissioner’s representatives will potentially reach an entirely different one. However, section CD 22(7) does require the reviewer to consider the following factors:

• the nature and amount of dividends the company pays before or after the cancellation;

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

• the expressed purpose or purposes of the cancellation; and,

• any other relevant factor.

The only drawback of IS 25/19, in my view, is that it doesn’t provide sufficient commentary on the first two boxes, but instead is purely focused on the “anti-avoidance” components of section CD 22 – sections CD 22(6) and CD 22(7). I’ve already set out section CD 22(7), and in essence, all subsection (6) says is that the exclusion will not apply to an amount paid to the shareholder if any part of the payment is in lieu of the payment of a dividend.

However, arguably, we also have the inside knowledge of the proposed transaction by our client, which Inland Revenue (IR) will not. It’s quite easy in that regard to determine whether or not the requisite capital reduction thresholds under the relevant bright-line test will be satisfied, and then it’s a mathematical calculation to determine how much ASC our client has.

So I would suggest that IS 25/19 is very useful in its detailed discussion of each of the four factors which the Commissioner will consider. Also notable is that of the 40-page document, the detailed examples commence at page 19—each outlining a scenario and then working through each factor, to reach a conclusion of whether or not any of the amount paid is likely to be seen to be in lieu of a dividend.

Finally, an important distinction. If any of the amount paid is found to be in lieu of a dividend, then the whole amount paid will be a taxable dividend. However, where the amount paid is simply in excess of the available ASC, to the extent that the excess amount is deemed to be a taxable dividend, then only the excess amount is taxable (assuming the ASC amount has passed the “not in lieu of a dividend” test).

This article was originally published through the ‘A Week In Review’ newsletter. If you would like to receive Richard’s tax updates every Monday morning, you can subscribe here.