quote:
Originally posted by Snoopy
Problem Part 5 (WILDCAT September 2006 proposal)
The share price was $US37.99 and the exchange rate is $1US=65.75c at the start of FY2005. At the end of FY2005 the share price was $US51.81 and the exchange rate was $1US=70.70c
During FY2005 ‘Yum Restaurants International’ started paying dividends for the first time.
These dividends were at the rate of 10c per share, making a gross total of $20 per dividend payment. Withholding tax was deducted at a rate of 15%. That works out at $3 per dividend payment, leaving a net return of $17. Dividends were paid on three dates during FY2005. These dates accompanied by the $NZ/$US exchange rate on the day follow:
Div payment date 1: 6th August 2004; $NZ1=US64.47c
Div payment date 2: 5th November 2004; $NZ1=US69.05c
Div payment date 3: 4th February 2005; $NZ1=US71.02c
Once again ‘I’ makes no further share purchases or share sales during the year. What is ‘I’ tax liability for FY2005, due to owning these ‘Yum Restaurants International’ shares?
The ‘Fair Dividend rate’: 0.05x(V-V1) is
0.05x(200x37.99)/0.6575 = $NZ577.79
The total actual dividend income, including all withholding tax is :
(20/0.6447 + 20/0.6905 + 20/0.7102)= $NZ88.15
Clearly this is below the ‘Fair Dividend rate’, yet some US withholding tax -that is recognized in NZ as part of a dual taxation agreement, has already been paid, specifically:
($US3/0.6447 + $US3/0.6905 + $US3/0.7102)= $NZ13.22
We can use that tax already paid to offset tax that is deemed due under the ‘Fair Dividend rate’ method.
(200x$US51.50)/0.7070 - (200x$US37.99)/0.6575 = $NZ3012.71
Clearly this gain is larger than our fair dividend rate
Based on a tax rate of 33%, ‘I’s tax liability is:
0.33 x $NZ577.79= $NZ190.67
But some of that tax has already been paid in the USA. That leaves the net amount of tax to pay as:
$NZ190.67-$NZ13.22=$NZ177.45
(end of workings showing WILDCAT method in action)
SNOOPY
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