Double taxation of companies - Part Two

In New Zealand, certain company tax rules can unexpectedly lead to profits being taxed twice - a risk that can occur during ownership changes or business restructures if a suitably qualified tax accountant is not engaged.

In theory, a company can live forever - but New Zealand tax law ensures that profits don’t stay locked away indefinitely. Eventually, those profits must be paid out to shareholders and taxed, often at higher personal tax rates.

See - Why am I paying tax on my company dividend, haven't I already paid?

One way this is enforced is through the cancellation of imputation credits (see Part I) when there is a shareholding change of more than one-third. If these credits - which represent company tax already paid - are lost, shareholders can end up paying tax again on the same profits.

This is double taxation, and it can lead to a significant and unexpected tax cost.

The solution? Before any major change in company ownership, it's critical to declare a dividend that uses up the affected imputation credits. This ensures the company’s profits are taxed only once, and the benefit of prior tax payments is passed on to shareholders.

Don’t Risk Losing Your Imputation Credits

The rules around ownership changes and imputation credits are complex - and the consequences of getting them wrong can be costly.

To avoid double taxation, work with a qualified and experienced chartered accountant who understands the risks and knows how to structure changes correctly.

Written by Simon Cook - Chartered Accountant