Forum Archive Index - December 2002

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi Allan,

>
> 
>The
>supplemental payment received by us (if it is full) just offsets the
>withholding tax.  You say "tax that is not withholding tax" -- there
>is 15% non-resident withholding tax -- the supplemental dividend    
>simply puts us in the same position as a Kiwi investor, we do not
>get "superior tax treatment to the locals" (which) "might distort
>the local market".
>
>

OK, I'll try to clarify what I meant.

The reason that a New Zealand company earns imputation credits is 
because the company has already paid tax on their profits.  

The NZ government decided that if these profits were paid out to 
shareholders in the form of a dividend, then it isn't fair that the 
person who receives the dividend pays tax on that dividend, given 
that the company has paid tax on the money that went to make up that 
dividend already.

This imputed dividend is 'tax free' to NZ shareholders, not 
because the government is giving shareholders a tax holiday, but 
because the company they hold shares in has already paid the tax for 
them.

I understand you do not have this system in the USA?

However, sometimes a company's profits are *not* taxed at the company 
level in New Zealand.  The company may have tax losses to use up, the 
profit may be a capital gains profit or there may be some other 
reason that the government has not had their slice of the cake.  
There is nothing to stop a company paying a dividend to shareholders 
in this case.  But if the company chooses to do this, the 
shareholders must pay tax on any dividend received themselves, 
because the company hasn't.

This tax is what is termed in tax law 'witholding tax'.  In other 
words 'witholding tax' specifically refers to the case where a 
company hasn't paid tax on any profits made in their own right.  A 
New Zealander, if they haven't informed the compnay of their income 
tax number, will get withholding tax deducted at 39%.  For an overseas 
investor the withholding tax rate is 15%.

The system in Australia is analogous, except that what we call 
'imputation credits' Australians term 'franking credits'.

New Zealand taxpayers cannot claim Australian franking credits.  
Likewise Australian taxpayers cannot claim New Zealand imputation 
credits.  *However* if 'witholding tax' has been deducted, then this 
*is* claimable in the other country.  Generally you will have more 
tax to pay in your home country if 15c is below your marginal tax 
rate.   Nevertheless the NZ/Australian governments do take account of 
the tax you have already paid in the other country, but only if you 
have paid 'withholding tax'.  They do not tax you twice on the same 
money in the case of withholding tax.  Any withholding tax paid in 
Australia will come off your tax bill in New Zealand and vica-versa. 
>
> 
> Australia's system is similar in operation.  If the dividend is 100%
> franked at 30% we end up getting the basic dividend -- the franked
> amount gives us an imputed credit -- which exactly offsets the
> withholding tax.  
>
>

Allan, I think you are using the term 'withholding tax' to refer to 
tax already paid of any kind.  This is not what it means in an income 
tax sense in Australia and New Zealand.

If I get a dividend (say 11c per share) from Australia that is 100% 
franked (a 4.71c per share franking credit) I cannot access the value 
of this franking credit.  Furthermore, this dividend does not 
contain 'withholding tax'.  Not only that, I have to pay tax on the 
11c. If my marginal tax rate is 33%, I will end up paying 11 x 0.33 = 
3.63c per share extra tax to the NZ government.

>
>
>In operation we end up even with an Aussie
> investor as far as Aussie-land goes -- we still have to pay our
> government taxes, so in that respect are handicapped -- but, that is
> the cost of doing business with an overseas country.
> 

Ok, here is the nub of the question then.

CASE1/  You own shares in Telecom and get a 5c dividend that contains 
a 2.5c imputation credit and a 0.8824c supplementary dividend.

What is the *gross* dividend that arrives in the mail?  Is it 5c, 
or 5.8824c?

CASE2/  You own shares in Telstra and get an 11c dividend that 
contains a 4.71c franking credit.

What is the gross dividend that arrives in the mail?  Is it 
11c?

>
> 
> On the overseas investor increasing the SIZE of your market.  I've
> purchased a number of IPO's in NZ.  
>
>

Purchasing shares in an IPO does increase the size of the market.  I 
won't disagree with you there. 

>
>
>
> What would happen to your
> market if all overseas investors quit investing in Jan. of 2003.  
>
>

If locals bought all the overseas investors out, the size of the 
market would be unaffected in my way of looking at things.  All the 
companies would still need the same number of workers.  Nobody would 
lose their job for the sole reason that an existing share  had any 
change in ownership.

SNOOPY



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