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Income Tax Act 2007

Income - Income from equity

CD 8: Elections to make bonus issue into dividend

You could also call this:

“Choosing to treat free shares as taxable income”

When a company gives out free shares, it’s called a bonus issue. Usually, this isn’t counted as income. But sometimes, a company can choose to make it count as income, which is called a dividend.

For a bonus issue to be a dividend, it needs to meet some rules. First, it can’t be a special kind of bonus issue called a ‘bonus issue in lieu’ or a share given out under a profit distribution plan. It must be fully paid for from the company’s extra money (called reserves). Also, if it were a normal dividend, it couldn’t be exempt from tax under a rule for dividends within wholly-owned groups in New Zealand.

If these conditions are met, the company can choose to make the bonus issue a dividend. To do this, the company needs to do three things. They must decide that it’s a dividend when they give out the bonus issue. They also need to decide how much of it will be treated as a dividend (it has to be more than zero). Finally, they need to tell the tax office (the Commissioner) about their choice and the amount.

The amount of the dividend is whatever the company chooses it to be. This means the company gets to decide how much of the bonus issue will count as income for tax purposes.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1512558.

Topics:
Money and consumer rights > Taxes
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Part C Income
Income from equity

CD 8Elections to make bonus issue into dividend

  1. A bonus issue that is not a bonus issue in lieu or a share issued under a profit distribution plan is a dividend if—

  2. the bonus issue—
    1. is issued fully paid from reserves of the company:
      1. if a dividend, would not be exempt income under section CW 10 (Dividend within New Zealand wholly-owned group); and
      2. the company chooses under this section to treat the bonus issue as a dividend.

        1. A company chooses to treat a bonus issue as a dividend by—

        2. resolving, when it makes the bonus issue, that it is a dividend; and
          1. resolving, when it makes the bonus issue, the amount to be treated as a dividend, which must be more than zero; and
            1. giving notice to the Commissioner under section 63 of the Tax Administration Act 1994 of the election and the amount.

              1. The amount of the dividend is the amount chosen by the company.

              Compare
              Notes
              • Section CD 8(1): amended (with effect on 1 October 2012), on , by section 8(1) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).
              • Section CD 8(1)(a)(ii): amended (with effect on 1 July 2011 and applying for income years beginning on or after that date), on , by section 4(1) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
              • Section CD 8 list of defined terms profit distribution plan: inserted (with effect on 1 October 2012), on , by section 8(2) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).
              • Section CD 8 list of defined terms share: inserted (with effect on 1 October 2012), on , by section 8(2) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).