Problem Part 5 (DRWT 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?

'Deemed assessable income' is the maximum of either (a) the dividend income or (b) the amount calculated using the capital appreciation formula

(a) Total dividend income, including all withholding tax is:
(20/0.6447 + 20/0.6905 + 20/0.7102)= $NZ88.15

(b) Wealth tax due is: 0.03x½{(A+A1)+(B-B1)}
0.03x½{(200x51.50)/0.7070 + (200x37.99)/0.6575} = $NZ391.87

Clearly (b) is larger than (a), so the dividends received are not enough to offset our wealth tax liability. That means $NZ391.87 becomes our 'deemed assessable income'.

Based on at tax rate of 33%, ‘I’s tax liability is:

0.33 x $NZ391.87= $NZ129.32

However, some US withholding tax -that is recognized in NZ as part of a dual taxation agreement, has already been paid, specifically:

(3/0.6447 + 3/0.6905 + 3/0.7102)= $NZ13.22

That leaves the net amount of tax to pay as:

$NZ129.32-$NZ13.22=$NZ116.10

(end of second method example)

SNOOPY