Remedial amendment to shareholder continuity rules

2012 amendment allows continuity of shareholding in a company when a trust established for the sole benefit of the NZ or an overseas Government is terminated.

New section YC 19B of the Income Tax Act 2007

New section YC 19B allows continuity of shareholding in a company when a trust that is established for the sole benefit of the New Zealand or an overseas Government is terminated and the shareholding is transferred to the Government.

Background

During the recent global financial crisis, some troubled companies were bailed out by Governments by setting up a trust to hold their ownership interest in the bailed-out company for the sole benefit of the Government.

Before the amendment, when the trust terminates and transfers the shareholding to its sole Government beneficiary, the shareholder interest in the bailed-out company changed from the trustees of the trust to the Government beneficiary. This is because when the shares are owned directly or indirectly by a trust, there is no tracing through to the beneficiaries of the trust; section YC 9 treats all the trustees of a trust as an ultimate shareholder.

As a consequence, the bailed-out company faced a substantial change of ownership interest when the ownership of its shares changed from the trustees of the trust to the Government beneficiary, preventing it from carrying forward its losses or tax credits. This occurred even though, in substance, there was no change of economic and beneficial ownership.

Key features

New section YC 19B allows continuity of shareholding in a company when a trust that is established for the sole benefit of the New Zealand or an overseas Government is terminated and the shareholding is transferred to the Government. The Government beneficiary is treated as acquiring the ownership interests in the company that are transferred by the trustees of the trust on the date the trustees acquired the ownership interests.

Application date

This amendment applies from 1 January 2011.