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Income Tax Act 2007

Recharacterisation of certain transactions - Recharacterisation of certain commercial arrangements

FA 4: Recharacterisation of shareholder’s base: company reacquiring share

You could also call this:

“Company buying back shares: How it affects your remaining shares' cost”

This section talks about what happens when a company buys back its own shares from you. It applies if you hold shares as a way to make money and you still have some shares left after the company buys some back.

If the company gives you money for your shares and it’s all treated as a dividend, you’re not seen as having sold the shares. The cost of those shares is added to the cost of your remaining shares.

If the company pays less than what the shares are worth when they first announce they’re buying them back, a few things happen:

  1. Some of the cost of the cancelled shares is added to the cost of your remaining shares.
  2. You can’t claim a deduction for the amount added to your remaining shares, unless the shares were your trading stock.
  3. Special rules about selling trading stock for less than it’s worth don’t apply here.

There’s a special calculation to figure out how much to add to your remaining shares’ cost. It takes into account the cost of the cancelled share, the total cost of all your shares before cancellation, the amount you got for the cancellation, and the market value of all your shares just before cancellation.

The extra cost is divided fairly among your remaining shares of the same type. This matters when you need to work out the value of your trading stock or for other reasons.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1516265.

Topics:
Money and consumer rights > Taxes
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“Tax treatment of dividends that recover share costs for business-owned shares”

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“Tax rules for buying and selling previously leased assets”

Part F Recharacterisation of certain transactions
Recharacterisation of certain commercial arrangements

FA 4Recharacterisation of shareholder’s base: company reacquiring share

  1. This section applies to a shareholder in a company in relation to an off-market cancellation of shares by the company under section CD 22 (Returns of capital: off-market share cancellations) when—

  2. the shareholder holds the share as revenue account property; and
    1. after the cancellation, they continue to hold some shares of the same class.

      1. If the whole of the amount that the shareholder receives for the cancellation is treated as a dividend, the following paragraphs apply:

      2. the shareholder is not regarded as having disposed of the cancelled share, except for the purpose of determining whether they have derived a dividend; and
        1. the cost to the shareholder of the cancelled share is added to the cost of the shareholder’s remaining shares of the same class under subsection (6).

          1. If subsection (2) does not apply, and the amount paid by the company is less than the market value of the shares at the time when notice is first given of the cancellation either by the shareholder or the company, the following paragraphs apply:

          2. an amount calculated using the formula in subsection (4) is added to the cost of the shareholder’s remaining shares of the same class under subsection (6); and
            1. the amount is excluded from the cost of the share being cancelled so that the shareholder is denied a deduction under section DB 25 (Cancellation of shares held as revenue account property) for the amount unless the share is trading stock of the shareholder; and
              1. sections GC 1 and GC 2 (which relate to the disposal of trading stock for inadequate consideration) does not apply.

                1. The formula referred to in subsection (3)(a) is—

                  share cost − (cost pre-cancellation × amount from cancellation ÷ market value).

                  Where:

                  • In the formula,—

                  • share cost is the cost of the cancelled share to the shareholder:
                    1. cost pre-cancellation is the total cost to the shareholder of all their shares of the same class immediately before the cancellation:
                      1. amount from cancellation is the amount derived by the shareholder from the company for the cancellation:
                        1. market value is the total market value of all the shareholder’s shares of the same class immediately before the cancellation.

                          1. Subsection (7) applies at a time after the cancellation when the cost of the remaining shares is taken into account under subpart EB (Valuation of trading stock (including dealer’s livestock)), or otherwise.

                          2. The amount referred to in subsection (2)(b) or (3)(a) must be fairly divided among, and added to, the cost of the shareholder’s remaining shares of the same class.

                          Compare
                          Notes
                          • Section FA 4 heading: amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                          • Section FA 4(2)(b): amended (with effect on 1 April 2008), on , by section 94(1) (and see section 94(2)) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).