New Zealand's Inland Revenue has released a draft Operational Statement on bright line tests for classifying off-market share cancellations as taxable dividends or non-taxable capital returns. The guidance addresses the Commissioner's notice requirements under section CD 22 of the Income Tax Act 2007. Public consultation closes on 23 March 2026.
New Zealand’s Inland Revenue has released a draft Operational Statement for public consultation addressing the bright line tests used to classify off-market share cancellations as either taxable dividends or non-taxable capital returns.
This operational statement provides guidance on the tax treatment of off-market share cancellations, focusing on the bright line tests and the Commissioner’s notice requirements under section CD 22 of the Income Tax Act 2007. It explains when payments made on share cancellations are not to be treated as dividends, the process for requesting a Commissioner’s notice, and the implications if a payment is later found to be a dividend.
The draft operational statement emphasises the necessity of obtaining a formal notice from the Commissioner for cancellations involving a capital reduction between 10% and 15%. It outlines the application process, the specific records companies must provide, and the anti-avoidance rules designed to prevent payments made in place of dividends. Additionally, the statement clarifies the legal consequences of failing to secure proper notification and the rights of taxpayers to challenge unfavourable decisions.
The “Bright Line” Tests To qualify for the dividend exclusion, the payment must be equal to or less than the available subscribed capital (ASC) per share and must satisfy one of the “bright line” tests. The classification depends on the scale of the capital reduction:
- Greater than 15% reduction: These cancellations typically meet a bright line test and are excluded from the dividend definition, provided they do not breach anti-avoidance rules.
- 10% to 15% reduction: These only meet the bright line test if the Commissioner of Inland Revenue issues a formal notice stating the payment is not in lieu of a dividend.
- Less than 10% reduction: These do not meet the bright line test and are treated as taxable dividends.
How to request a notice
Companies must submit written applications with comprehensive supporting documentation, including confirmation of legal authority to cancel shares and the transaction date, detailed calculations of available subscribed capital (ASC) and share market valuations, and an analysis of four anti-avoidance factors.
The consultation is set to conclude on 23 March 2026.
