From time to time IRD issue what they call Revenue Alerts and these are intended to provide information about significant or emerging issues which are of concern to IRD.

Last week IRD issued Revenue Alert 18/01 which looks at dividend stripping.

Dividend stripping occurs where a person sells shares for a tax-free capital gain instead of receiving a taxable dividend from the company. The IRD is concerned primarily where a person sells shares in a company to another entity in which the person has a significant ownership interest, i.e. there is arguably little change in ownership.

The avoidance rules around dividend stripping are contained in Section GB 1 and have been with us for a significant period of time, however a recent case Beacham v CIR has highlighted this issue and given the Inland Revenue Department a renewed focus in this area. 

The problem for SME businesses is that almost any type of family restructure is potentially caught under the broad words of the dividend stripping rules. However, some comfort has historically taken from the need for there to be a tax avoidance arrangement before the avoidance provisions could apply and this meant that as long as tax issues were merely incidental the avoidance rules could not apply. However, the Department’s Revenue Alert diminishes this and provides a number of examples which seem to have a reasonably commercial focus where they conclude the dividend stripping rules will apply. 

Our concern with this is that in the hands of an IRD auditor this Revenue Alert gives them a mandate to treat pretty much any SME restructure as tax avoidance. 

Until further clarity is received around this issue any SME business looking to restructure will need to take great care not to walk into a tax issue. IRD have suggested SME’s can get certainty around this issue by seeking an IRD binding ruling, however the time and cost of the binding ruling process mean for most SME’s this is just not feasible.