For example, there can be marital changes, shareholders spitting the dummy and walking out, taking on an amazing new person, or even death.
It’s vital that you understand the implications of shareholding changes in New Zealand companies. What do you need to consider?
When a business makes a tax loss, it can be accumulated over time and used to offset profit made in the future. These are known as ‘losses available to carry forward’.
These available losses actually have a value. Imagine a very profitable business buying the shares of a company with huge losses. The profit-making company takes advantage of the losses and pays less tax as a result.
Inland Revenue doesn’t like this.
Under the old ‘shareholder continuity test’ (2020 and previous tax years), changes in shareholding of more than 50% would breach the test and tax losses would be forfeited.
For the 2021 tax year onwards, you wouldn’t lose the losses if you meet Inland Revenue if there are no major changes* to the business within five years of the shares changing hands. This is called the ‘Business continuity test’.
* Inland Revenue’s website includes its meaning of ‘major change‘, and of course, these factors can be subjective.
If the shareholding changes by more than 34%, you can lose imputation credits – put simply, any tax paid by the company is forfeited and cannot be attached to dividends paid out to shareholders.
For a better understanding of imputation credits, check out our blog on Dividends and Imputation Credits.
If more than 25% of your company is owned by an overseas person or entity, and you are defined as ‘large’,* you will need an audit. Not only this, but the financial statements must be prepared in accordance with NZ’s versions of International Financial Reporting Standards (NZ IFRS), or Not-for-profit Standards.
You cannot opt out.
This can be a significant cost, and rarely adds any useful information to the business.
* Large is where for two consecutive periods, the company’s assets are more than $60 million OR revenue is above $30 million.
Number of shareholders
If a company has more than 10 shareholders, you could be required to prepare accounts under NZ IFRS if you don’t opt out in time. NZ IFRS is not something you want to deal with in a small privately owned company. The cost is significant, so be aware of this when taking on new investors.
If your company has a special tax status – such as a qualifying company or look-through company (LTC) – changing the shareholding could lose that status, resulting in a tax liability for the shareholder.
These are not compulsory but must be followed if in place. Shareholder agreements usually include details of what happens in the event of a shareholder leaving the company, whether voluntarily or involuntarily, or if the company ceases trading.
Make sure these are updated!
Before you make any significant shareholding model changes, get in touch with a phone call (0800 755 333) or email at [email protected].