Forum Archive Index - December 2002

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

Hi Allan,

> 
>I was unfamiliar with the NZ legal concept of withholding tax.  I
>was using it simply as tax withheld by a vendor,(a portion of what
>they pay you) that is sent directly to the government and for which
>you get credit when you file your final taxes.
>
>

I think it is just the different cultural way of looking at things 
which is confusing me.   You, Allan, are thinking of the American 
system where all dividends are subject to tax, whether or not the 
company that is paying you the dividend has paid tax on it already.

Thus in the American system any tax deduction that is shown on 
the dividend statement, tax that has been paid directly to 
the government, really is witholding tax.   I imagine all American 
dividends have witholding tax taken off them.

By contrast, I don't regard New Zealand imputation credits on my 
dividend statement as a witholding tax, because there truly is no 
requirement for me to pay tax on a fully imputed dividend.   The act 
of the company paying its own tax, discharges the tax responsibility 
attached to those earnings. In the New Zealand way of looking at 
things, you cannot have witholding tax on a fully imputed dividend.  
As far as the shareholder that is receiving the fully imputed 
dividend is concerned, the idea of 'witholding tax' on that 
dividend doesn't make sense, because there is no legal requiremnt for 
the shareholder to pay any tax on an imputed dividend.  You can't 
withhold tax on a tax bill, when the tax bill is zero. 


>
> 
>In CASE 1 you state:  "You own shares in Telecom and get a 5 cent
>dividend that contains a 2.5 cent imputation credit and a 0.8824
>supplementary dividend."  What is the *gross* dividend that arrives
>in the mail?  Is it 5 cents or 5.8824c?
> 
>The  answer is 5c and the supplementary dividend would be 0.7500 and
>not 0.8824.
>
>

Are you sure about that Allan?  Witholding tax rate is at 15% so...

5c x (0.15) = 0.75c (your figure)

but

5.8824 x (1-0.15) = 5c

Isn't the witholding tax usually taken off the gross amount? (If you 
get a cheque for 5c this implies a gross payment of 5.8824c)

>
> 
>In CASE 2 you state:  "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.  Yes it is, but our
>franking credit would not be that high, but somewhat under that.
>
>

Careful with the terms here Allan.  When you say 'our franking 
credit' are you sure you don't mean 'our witholding tax'?  I wasn't 
aware that Americans could utilise Australian franking credits.   

Perhaps, to clarify things, you have an Australian example of your 
own you can quote us?

> 
>
>On the size of your market question.  Do you even remotely think
>that if all overseas investors sold all of their holdings, Kiwi
>investors wold buy all of the shares???  
>
>

No.

>
>
>If it were possible, at what price wold the shares be
> purchased???  At the very least the capitalization 
>of you market (size) would be slimmed down
>drastically.
>
>

I don't doubt that the market capitalization of the NZ market would 
fall if all the overseas investors pulled out.  But just because the 
market capitalisation shrinks, does not mean that the working capital 
of the companies themselves shrinks.  That is the point I was trying 
to make.

>
> 
>If all overseas investors stopped buying NYSE shares, our market
>would collapse.  DOW 2,000 anyone???
>
>

Don't tempt fate on that one Allan ;-)


> 
> Hopefully we are all more enlightened than when the subject was
> first brought up -- that is the purpose of this forum, isn't it??
> 


For Sure.

SNOOPY


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