Tax Bites #10 - Changes in Shareholding
About the Author:
MURRAY McCLENNAN
Director at Tax Central
A chartered accountant and a member of the International Fiscal Association and the Society of Trust and Estate Practitioners, Murray has over 30 years experience in tax.
Changes in shareholding can result in unintended tax consequences. In this article I highlight some of the (i) main tax issues to consider and (ii) commonly-held misconceptions. Note, the following comments do not apply to QCs, LTCs, or listed companies.
Shareholder continuity
Shareholder continuity is central to many issues relating to changes in voting interests based on shareholdings. It is calculated by taking the lowest shareholding that a person has during his or her time as a shareholder.
The following is a simple example.
Losses
Shareholder continuity of at least 49% is required to be able to carry forward losses within a company. If shareholder continuity falls below that threshold there will be a forfeiture of losses.
Imputation Credits
Shareholder continuity of at least 66% is required to carry forward imputation credits within a company. If shareholder continuity falls below that threshold there will be a forfeiture of imputation credits.
This will have a cash flow consequence where the company has retained earnings that are subsequently distributed as dividends. Additional resident withholding tax will need to be deducted from the cash portion of the dividend. Also, the level of dividend income will be reduced.
Indirect ownership
Where a company is a shareholder, the general rule is that you must “look through” that company to determine the indirect ownership held by individuals and trusts.
Company A has 100 shares, which are owned 10 shares each by Mr A, Ms B, Ms C and Mr D, and 60 shares owned by company B. Company B has 100 shares owned 10 shares each by Ms B and Ms C, and 80 shares owned by the Trustees of the ABCD Trust.
The shareholding of company A is: TABLE The fact that all four individuals are beneficiaries of the ABCD trust or that Mr A and Ms C are trustees of that trust has no impact on the individuals’ own shareholding percentages.
Commonly held misconceptions
The following are some of the misconceptions that I have encountered among accountants and lawyers:
Myth 1.
There is no need to “look though” a company shareholder. In almost all cases a look through corporate shareholders is required to determine indirect ownership. An exception is where a company has a less than 10% shareholding in another company;
Myth 2.
Shareholder continuity only needs to be met on an annual basis to carry forward losses and imputation credits. In fact, shareholder continuity must be met from the (i) the beginning of the income year of loss until the end of the income year in which the loss is utilised, and (ii) the time of credit to the imputation credit account to the time of attaching to a dividend;
Myth 3.
Shareholder continuity is preserved with all share transfers between spouses or persons in a civil union or de facto relationship, in that the transferee (recipient of shares) is deemed to have acquired them when the transferor did. In fact, only transfers pursuant to a valid Relationship Property Agreement receive this treatment; and
Myth 4.
All shares rank equally. In fact, for classes of shares with different voting rights, the continuity must be calculated taking into account these four decision-making rights:
Dividends;
Company constitution;
Variation in company capital; and
Appointment of directors.
If the shares held by Mr A in the above example gave rights to vote on dividends, but none of the other decisions, then Mr A's holding would need to be adjusted as follows:
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