New Zealand Government To Counter Stapled Securities Tax Loss

by Mary Swire, Tax-News.com, Hong Kong

26 February 2008

The New Zealand government has announced that legislation will be amended to prevent revenue loss associated with certain types of stapled securities.

In a joint statement issued on Monday, Finance Minister Michael Cullen and Revenue Minister Peter Dunne stated that the cabinet had agreed to change the law to bring the tax rules up-to-date with developments in financial products, but also to prevent "a serious loss to the revenue base from the use of those instruments".

“Stapled stock instruments are relatively common overseas but until recently have not been used much in New Zealand, and our tax rules have yet to catch up,” they explained.

The ministers' statement continued:

“The issue arises from the fact that by using stapled stock instruments with debt components, companies can pay tax-deductible interest to shareholders as a substitute for dividends. The issue becomes particularly acute if the instruments are issued to foreign investors in New Zealand companies."

“If those instruments were to become common in New Zealand the amount of debt deductions against our tax base could increase significantly."

“The government will therefore amend the Income Tax Act to ensure that when a debt instrument that would normally give rise to tax deductions is stapled to a share it will be treated as equity for tax purposes – meaning that no deductions for interest payments will be available."

“The change will be included in the next available taxation bill and, once enacted, will apply to stapled stock issued or stapled on or after today. Securities that have already been issued will not be affected by the legislative change."

The ministers concluded: “Today’s announcement is being made without prior consultation with interested parties because it is a matter of urgency, since some companies may be contemplating the issue of the type of stapled stock in question. An early announcement of what will be legislated for gives certainty of future tax treatment to companies and shareholders alike."

“Before legislation is introduced, tax policy officials will consult with interested parties on the details of the proposed changes."

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