2006 amendment to the dividend rules ensures certain payouts remain deductible to cooperatives and taxable in the hands of members at their marginal tax rate.

Sections CD 1B, CD 24B and DV 10B of the Income Tax Act 2004 and section 74D of the Estate and Gift Duties Act 1968

To remove uncertainty in the treatment of payouts made by cooperatives to their members, an amendment to the dividend rules ensures that certain payouts are not treated as dividends but remain deductible to the cooperative and taxable in the hands of members at their marginal tax rate.


Cooperatives can deduct distributions of profits arising from transactions with their members under the mutuality provisions contained in section HF 1 of the Income Tax Act 2004. Under the general deductibility provisions, however, it was not clear whether cooperatives could treat profits from activities not associated with members in the same manner – for example, investment activities that do not relate to the purchase or supply of product to or from the member.

The amendment clarifies the legislation and ensures that payouts from cooperatives, including value-added components from non-member transactions, will not be treated as dividends and will continue to be deductible subject to certain criteria.

The deductible treatment of payouts applies to most types of cooperatives, including those that receive payments from member shareholders and purchase product on their behalf (such as trading cooperatives).

Payouts from cooperatives to charities and exempt taxpayers will receive the same treatment as taxpaying shareholders. This means that payouts to exempt taxpayers will not be taxed. This treatment is in line with the policy objective of not taxing such organisations.

Key features

Section CD 24B ensures that New Zealand cooperative companies (or wholly owned subsidiaries of cooperative companies) may elect to exclude certain distributions made by or to members from being a dividend.

For the payout to be excluded from being a dividend and therefore deductible, it must be connected to the supply of trading stock traded between the cooperative and the member. This ties any payout from the cooperative to the member to the sale or receipt of goods. The principal purpose of holding any shares in a cooperative must be for the trade in a product with the cooperative. If a member holds shares in the cooperative and those shares are not required in order to trade with the cooperative, any distribution relating to those shares will be treated as a dividend.

The following further criteria must be met for a distribution to be excluded from being treated as a dividend:

  • The cooperative company has reasonable grounds to believe that the member receiving the distribution is resident in New Zealand or has a fixed establishment in New Zealand at the time the distribution is made.
  • The distribution must relate to the sale and purchase of tangible property. Payouts relating to the sale of intangibles, such as services and financing, will not be allowed to be deducted as trading stock by the cooperative.
  • The distribution must relate to current trading stock that is not sold as part of the disposal of a business. Section DV 10B ensures that a payout from a cooperative will be treated as deductible expenditure to the cooperative if it meets the criteria outlined in section CD 24B.

Section 74D in the Estate and Gift Duties Act 1968 ensures that this type of payout made by a cooperative company to a member of that company is not treated as a dutiable gift.

Application date

The exclusion of payouts from the definition of a dividend will apply from the 2005–06 and subsequent income years.