New Overseas Tax Rules - Worked sample problem

[Snoopy]

quote:Originally posted by Mick100

Question

Where does an ASX listed company with operations overseas (outside australia) fit into the scheme of things with regards to cap gains tax.

Firstly the new tax regime is NOT a capital gains tax. It is a Wealth tax In Lieu of a Dividend and Capital gain tax Above a Threshold. That makes it something entirely different, a 'WILDCAT' tax if you accept my acronym.

Secondly where a company is *listed* is not relevant. It is where the company is domiciled that matters. For example James Hardie has its primary listing and extensive operations in Australia but is domiciled in the Netherlands, and so comes under the new tax regime.

BHP Billiton is an interesting case because it is 'dual listed' in both Australia and the UK. If you hold UK domiciled BHP shares and receive your dividends in pounds then these shares fall under the new regime. If you hold the same shares in Australia and receive Aussie dollar dividends then these shares do not fall under the new regime.

The principal requirement for an Australian company to be exempt is that they run an Australian franking credits account. My interpretation is that if such an Australian company expands with overseas sales to the extent that their dividends are no longer fully franked, that does not disqualify them from being exempt from the new tax regime because principally they still pay their tax in Australia.
If however they were to relocate overseas, like Newscorp, then such a company would lose their tax exempt status.

Does that cover things?

SNOOPY

[Mick100]

quote:Originally posted by Snoopy
[

Does that cover things?

SNOOPY

That covers it

Thanks Snoopy
,

[Dazza]

how would buying managed funds from australia work on the new laws?

[moimoi]

Dazza,

as i understand it you would now be better off buying a NZ fund that invests in Oz, and then ensure that said fund is registering for "PIE" status.

PIE commences in Oct 07...effectively means that actively managed funds will not pay capital gains taxes on their trading anymore and their tax payable will be capped to 33%. It is expected that this will increase the returns for active funds.

cheers
moi

Discl: I ain't no boffin. So check yourself.

[Snoopy]

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

This is just an update on the Cullen Dunne tax proposal as it was legislated. The main difference between what was legislated and the September 2006 proposal that I examined in page 2 of this thread concerns the treatment of dividends.

In the legislated proposal, the dividend is considered as part of the overall capital return used to check if a gain has really been made at the end of the year. This only changes what happens to companies that pay dividends. That means the only step in my problem that changes compared to my previous example is 'Problem Part 5'. So let's see what happens with the legislation as drafted.

The ‘Fair Dividend rate’ is:

0.05x(200x37.99)/0.6575 = $NZ577.79

The actual return for FY

(200x51.81)/0.7070c-(200x37.99)/0.6575
+(20/0.6447 + 20/0.6905 + 20/0.7102)= $NZ3188.55

Clearly that return is positive, so we can't get out of paying the tax (the provision not to tax losses is not applicable). The actual total return is also greater than the Fair Dividend Rate. So we have to pay tax on the fair dividend rate amount. Assuming a tax rate of 33%, the tax payable is:

0.33x$NZ577.79= $NZ190.67

Yet some of that tax has already been pre-deducted as witholding tax in the United States.

($US3/0.6447 + $US3/0.6905 + $US3/0.7102)= $NZ13.22

So the actual tax payable is: $NZ190.67-$NZ13.22= $NZ177.45

Note that this is exactly the same tax payable as in the September 2006 proposal.

Doing it this way solves the problem of where you declare your overseas dividends in your tax return. The answer is you don't declare the dividends as dividends, unless those dividends exceed the 5% 'deemed return' once you take into account the effect of share price decline (if any) during the year.

You do however declare any 'witholding tax paid' overseas as this can be used to offset any tax payable on your '