Unclassified fringe benefits

2010 legislative amendment prevents companies from electing to treat any benefit provided to a shareholder-employee as a dividend. Applies 2005-6 tax year onwards.

Sections CX 17(4) of the Income Tax Act 2007 and CX 16(4) of the Income Tax Act 2004 have been amended retrospectively, with an appropriate savings provision, to prevent a company from electing to treat any benefit provided to a shareholder-employee as a dividend.

Background

The Taxation (Venture Capital and Miscellaneous Provisions) Act 2004 amended section CX 16(4), by replacing the punctuation between paragraphs (a) and (b) in section CX 16(4) of the 2004 Act. This punctuation change resulted in a change in outcome of the rule that was inconsistent with the policy intention of the rule.

Section CX 16(4)(a) and (b) permit a company to elect to treat an "unclassified benefit" provided to a shareholder-employee as a dividend instead of being a fringe benefit). This election was not intended to be available to other types of fringe benefit that were specifically listed (such as, for example, a motor vehicle).

However, as previously drafted, both sections permitted a company to elect that any benefit provided to a shareholder-employee be treated as a dividend. Both sections have been amended to ensure that the election can only be made in relation to an "unclassified benefit".

Application date

The amendments apply from the beginning of the 2005–06 income year (both the 2004 and 2007 Acts have been amended). A savings provision for both sections CX 17(4) (of the 2007 Act) and CX 16(4) (of the 2004 Act) applies to protect taxpayers who may be adversely affected by the retrospective amendment.