Capital tax unfair, says Hawkins

Association chairman of the Shareholders Association, John Hawkins.

New Zealanders are being taxed on their own capital because of unfair rules covering shares in demerged companies, but the Government argues the Inland Revenue Department does not have the resources to fix the problem, the New Zealand Shareholders Association says.

Association chairman John Hawkins said Revenue Minister Todd McClay wrote to him saying there was merit in the argument that taxing shares in demerged companies was unfair. But McClay said tackling the issue would require a law change and the tax department was not resourced to deal with it.

"Frankly, that is not good enough," Hawkins told the association's annual conference in Hamilton yesterday.

He cited the example of when BHP Billiton demerged South32 into a separate business this year. There was no dividend paid and no change in the overall value of the shareholding. Investors were given the same value of shares in South32 as they had in BHP.

BHP retained its core business of iron ore, copper, coal, petroleum and potash, which were its highest-margin assets, while the rest of its assets were put into South32.

The Australian Taxation Office issued a class ruling in June saying Australian resident shareholders of BHP Billiton would not be taxed on the receipt of the ASX-listed shares of South34, which is headquartered in Perth. But Hawkins said that in New Zealand, BHP shareholders had to pay tax at their marginal rate on the full value of the South34 shares, despite there being no change in value.

"We don't mind paying tax on dividends but why should we pay tax when it's purely a split of our own capital," he said.

Another example he cited was when Westfield demerged its Australian and New Zealand property assets into Scentre Group. Shareholders in New Zealand found they did not have to pay tax if subject to the foreign investment fund (Fif) tax regime but if they were under the $50,000 Fif threshold, they were liable for tax on the full value of the demerger.

"We're not talking about taxing capital gains here, we're talking about taxing your own existing capital as if it was income," Hawkins said.

Association members voted Hawkins in as a paid part-time chief executive while a replacement is sought, as well as continuing as chairman. BusinessDesk